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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, 2003
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) 954-2000
(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 47,969,000 shares outstanding at July 31, 2003
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,
2002.
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three months ended June 30, Six months ended June 30,
2003 2002 2003 2002
Net sales $ 311,041,000 $ 257,864,000 $ 602,992,000 $ 503,508,000
Costs and expenses:
Cost of sales (227,950,000) (183,117,000) (445,552,000) (358,871,000)
Selling, general and
administrative (63,981,000) (54,345,000) (127,115,000) (105,622,000)
----------- ----------- ----------- -----------
Operating income 19,110,000 20,402,000 30,325,000 39,015,000
Interest expense (5,140,000) (5,064,000) (10,035,000) (9,847,000)
Other income (expense),
net 62,000 (440,000) 192,000 (286,000)
Minority interest 36,000 (43,000) 209,000 (15,000)
----------- ----------- ----------- -----------
Income from continuing
operations before income
taxes 14,068,000 14,855,000 20,691,000 28,867,000
Income taxes (4,121,000) (4,143,000) (4,277,000) (8,361,000)
----------- ----------- ----------- -----------
Income from continuing
operations 9,947,000 10,712,000 16,414,000 20,506,000
Loss on disposal of
discontinued operations,
net of tax benefit of
$222,000 (369,000) (369,000)
Cumulative effect of
change in accounting (7,984,000)
----------- ----------- ----------- -----------
Net income $ 9,578,000 $ 10,712,000 $ 16,045,000 $ 12,522,000
=========== =========== =========== ===========
COMMON STOCK DATA:
Basic and diluted net
income per share:
Income from continuing
operations $.21 $.24 $.34 $.45
Loss on disposal of
discontinued operations (.01) (.01)
Cumulative effect of
change in accounting (.18)
--- --- --- ---
Net income* $.20 $.24 $.33 $.28
=== === === ===
Weighted average common
shares outstanding
Basic 47,977,000 45,264,000 47,918,000 45,198,000
Diluted 48,016,000 45,461,000 47,940,000 45,394,000
Cash dividends per share $.20 $.20 $.40 $.40
of common stock
* 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,
2003 2002 2003 2002
Net income $ 9,578,000 $ 10,712,000 $ 16,045,000 $ 12,522,000
Other comprehensive income
(loss), net of tax -
Foreign currency
translation adjustments 3,491,000 6,471,000 6,530,000 5,427,000
Net derivative gain
(loss), cash flow hedges 843,000 (613,000) 2,286,000 (613,000)
---------- ---------- ---------- ----------
Comprehensive income $ 13,912,000 $ 16,570,000 $ 24,861,000 $ 17,336,000
========== ========== ========== ==========
See notes to condensed consolidated financial statements.
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2003 2002 (a)
---------- ----------
(Unaudited)
ASSETS
Manufacturing activities
Current assets:
Cash and cash equivalents $ 9,455,000 $ 9,782,000
Trade accounts receivable, net of allowances
for doubtful accounts 210,138,000 181,843,000
Inventories:
Raw materials 67,829,000 68,879,000
Work in process 59,600,000 63,971,000
Finished goods 45,828,000 50,952,000
Prepaid expenses 19,317,000 19,390,000
------------- -------------
Total current assets 412,167,000 394,817,000
Properties and equipment:
Land 5,954,000 6,251,000
Buildings and improvements 69,175,000 69,359,000
Machinery and equipment 239,544,000 233,677,000
Accumulated depreciation (175,005,000) (165,355,000)
------------- -------------
Net properties and equipment 139,668,000 143,932,000
------------- -------------
Goodwill, net of accumulated amortization 353,882,000 348,435,000
Other deferred charges and assets 55,108,000 44,046,000
------------- -------------
Total manufacturing assets 960,825,000 931,230,000
Net assets of discontinued operations, including
financial assets 10,392,000
Financial services activities - Lease financing
receivables, net of allowances for doubtful
accounts 227,483,000 226,788,000
------------- -------------
Total assets $ 1,188,308,000 $ 1,168,410,000
============= =============
See notes to condensed consolidated financial statements.
(a) The balance sheet at December 31, 2002 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,
2003 2002 (a)
-------- -----------
(Unaudited)
LIABILITIES
Manufacturing activities
Current liabilities:
Short-term borrowings $ 45,463,000 $ 16,432,000
Trade accounts payable 89,057,000 76,082,000
Customer deposits 33,171,000 28,326,000
Accrued liabilities and income taxes 105,932,000 101,044,000
------------- -------------
Total current liabilities 273,623,000 221,884,000
Long-term borrowings 228,707,000 279,544,000
Long-term pension liabilities 39,127,000 32,656,000
Deferred income taxes 39,779,000 33,495,000
------------- -------------
Total manufacturing liabilities 581,236,000 567,579,000
------------- -------------
Financial services activities - Borrowings 198,934,000 202,022,000
Minority interest in subsidiary 535,000 744,000
SHAREHOLDERS' EQUITY
Common stock - par value 48,418,000 48,394,000
Capital in excess of par value 91,303,000 91,114,000
Retained earnings 310,540,000 313,684,000
Treasury stock (14,836,000) (18,026,000)
Deferred stock awards (2,673,000) (3,136,000)
Accumulated other comprehensive income (25,149,000) (33,965,000)
------------- -------------
Total shareholders' equity 407,603,000 398,065,000
------------- -------------
Total liabilities and shareholders' equity $ 1,188,308,000 $ 1,168,410,000
============= =============
See notes to condensed consolidated financial statements.
(a) The balance sheet at December 31, 2002 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,
2003 2002
Operating activities:
Net income $ 16,045,000 $ 12,522,000
Cumulative effect of change in accounting 7,984,000
Loss on disposal of discontinued operations 369,000
Depreciation 11,911,000 10,565,000
Amortization 1,041,000 977,000
Working capital changes and other 17,882,000 25,101,000
---------- ----------
Net cash provided by operating activities 47,248,000 57,149,000
Investing activities:
Purchases of properties and equipment (8,777,000) (8,347,000)
Principal extensions under lease financing
agreements (80,015,000) (77,675,000)
Principal collections under lease financing
agreements 79,214,000 80,151,000
Proceeds from sale of discontinued operations 7,453,000
Other, net (1,637,000) (2,626,000)
---------- ------------
Net cash used for investing activities (3,762,000) (8,497,000)
Financing activities:
Increase (decrease) in short-term borrowings, net (70,981,000) (29,034,000)
Increase (decrease) in long-term borrowings 45,141,000 (2,021,000)
Purchases of treasury stock (117,000) (4,328,000)
Cash dividends paid to shareholders (19,142,000) (17,866,000)
Other, net 1,286,000 2,222,000
---------- ----------
Net cash used for financing activities (43,813,000) (51,027,000)
Decrease in cash and cash equivalents (327,000) (2,375,000)
Cash and cash equivalents at beginning of period 9,782,000 16,882,000
--------- ----------
Cash and cash equivalents at end of period $ 9,455,000 $ 14,507,000
========= ==========
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, 2002.
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 six months ended June 30, 2003 are not
necessarily indicative of the results to be expected for the full year of
2003.
3. The following table illustrates the effect on net income and earnings per
share for the six-month periods ended June 30, 2003 and 2002 if the
Registrant had applied the fair value recognition provisions of SFAS No.
123 to all stock-based employee compensation. For purposes of pro forma
disclosure, the estimated fair value of the options using a Black-Scholes
option pricing model is amortized to expense over the option's vesting
period.
Six Months Ended June 30,
2003 2002
Reported net income $16,045,000 $12,522,000
Deduct: Total stock-based employee
compensation expense determined under
the fair-value method for all awards,
net of related tax effects (393,000) (516,000)
---------- ----------
Pro forma net income $15,652,000 $12,006,000
========== ==========
Basic net income per common share:
Reported net income $.33 $.28
Pro forma net income $.33 $.27
Diluted net income per share:
Reported net income $.33 $.28
Pro forma net income $.33 $.26
The Registrant recorded stock-based employee compensation expense of
$766,000 and $732,000 for the six months ended June 30, 2003 and 2002,
respectively.
The intent of the Black-Scholes option valuation model is to provide
estimates of fair values of traded options that have no vesting
restrictions and are fully transferable. Options valuation models require
the use of highly subjective assumptions including expected stock price
volatility. The Registrant has utilized the Black-Scholes method to
calculate the pro forma disclosures required under SFAS No. 123 and 148.
In management's opinion, existing valuation models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options because the Registrant's employee stock options have significantly
different characteristics from those of traded options and the assumptions
used in applying option valuation methodologies, including the
Black-Scholes model, are highly subjective.
4. Interest paid for the six-month periods ended June 30, 2003 and 2002 was
$10,668,000 and $10,021,000, respectively. Income taxes paid for these
same periods were $2,701,000 and $3,722,000, respectively.
5. The Registrant's effective tax rates were 20.7% and 29.0% for the
six-month periods ended June 30, 2003 and 2002, respectively. A $1,863,000
tax benefit was recorded in the quarter ended March 31, 2003 associated
with the closure of a production facility in the United Kingdom.
6. The Registrant adopted SFAS No. 142, and accordingly discontinued the
amortization of goodwill effective January 1, 2002. As part of the
adoption, the Registrant completed a transitional goodwill impairment test
and determined that $7,984,000 of goodwill related to a niche Tool group
business was impaired. This amount was recognized as a charge to net
income as a cumulative effect of a change in accounting. The Registrant
determined the fair value of the reporting unit by calculating the present
value of expected future cash flows.
Changes in the carrying amount of goodwill for the six months ended June
30, 2003, by operating segment, are as follows:
Environmental Fire Safety
Products Rescue Products Tool Total
Goodwill balance
January 1, 2003 $128,857,000 $36,930,000 $99,985,000 $82,663,000 $348,435,000
Translation and
other 1,982,000 2,094,000 1,236,000 135,000 5,447,000
----------- ---------- ---------- ----------- -----------
Goodwill balance
June 30, 2003 $130,839,000 $39,024,000 $101,221,000 $82,798,000 $353,882,000
=========== ========== =========== ========== ===========
Other intangible assets (amortized and not amortized) were insignificant
for the six months ended June 30, 2003.
7. During 2000, the Registrant decided to divest the operations of the Sign
Group and began to search for a qualified buyer of that business. The Sign
Group manufactured illuminated, nonilluminated and electronic advertising
sign displays primarily for commercial and industrial markets and
contracted to provide maintenance services for the signs it manufactured
as well as signs manufactured by others. The Sign Group was carried as a
discontinued business since the strategic decision was made to exit the
business. On April 30, 2003, the Registrant completed the sale of the Sign
Group to a third party for cash and a note receivable, which together
approximated the net book value of the business. Sign Group revenues for
the six months ended June 30, 2003 and 2002 were $12,844,000 and
$20,054,000, respectively. The Registrant retained certain assets and
liabilities in conjunction with the sale.
8. In September 2002, the Registrant acquired Leach Company of Oshkosh,
Wisconsin, a leading manufacturer of rear load refuse collection bodies.
In October 2002, the Registrant also acquired Wittke, Inc., a manufacturer
of dynamic truck-mounted refuse collection equipment located in Medicine
Hat, Alberta and Kelowna, British Columbia. The assigned values of these
acquisitions are based upon preliminary estimates. The Registrant is
currently in the process of obtaining valuations of the acquired
companies' assets and liabilities, which will determine the final
allocation of the purchase prices.
9. During the first quarter of 2003, the Registrant approved a restructuring
plan that principally included the closing of two manufacturing facilities
to improve operating efficiencies and reduce costs. As a result of this
plan, the Registrant recognized pretax restructuring and other charges of
$2,600,000 and $4,200,000 for the three and six month periods ended June
30, 2003. These charges are primarily aggregated within selling, general
and administrative expenses. A nominal amount of these costs remain unpaid
as of June 30, 2003.
10. The Registrant is subject to various claims, other pending and possible
legal actions for product liability and other damages arising out of the
conduct of the Registrant's business. The Registrant believes, based on
current knowledge and after consultation with counsel, that the outcome of
such claims and actions will not have a material adverse effect on the
Registrant's consolidated financial position or the results of operations.
The Registrant has been sued by firefighters in Chicago seeking damages
and claiming that exposure to the Registrant's sirens has impaired their
hearing and that the sirens are therefore defective. There are presently
26 cases filed during the period 1999-2003, involving a total of 1,663
plaintiffs pending in Circuit Court in Cook County, Illinois. An
additional lawsuit has been filed in Williamson County, Illinois against
the Registrant and five other unrelated co-defendants seeking class
certification for plaintiffs claiming damages to their hearing allegedly
as a result of exposure to the Registrant's sirens and design defects in
the unrelated co-defendants' fire trucks. The plaintiffs' attorneys have
threatened to bring more suits if the Registrant does not settle these
cases. The Registrant believes that these product liability suits have no
merit and that sirens are necessary in emergency situations and save
lives. The Registrant successfully defended approximately 41 similar cases
in Philadelphia in 1999 after a series of unanimous jury verdicts in favor
of the Registrant.
11. The following table summarizes the information used in computing basic
and diluted income per share:
Three Months Ended June 30, Six Months Ended June 30,
2003 2002 2003 2002
Numerators for both basic and
diluted income per share
computations:
Income from continuing
operations $ 9,947,000 $ 10,712,000 $ 16,414,000 $ 20,506,000
Loss from discontinued
operations, net of tax (369,000) (369,000)
Cumulative effect of
change in accounting (7,984,000)
--------- ---------- ---------- ----------
Net income $ 9,578,000 $ 10,712,000 $ 16,045,000 $ 12,522,000
========= ========== ========== ==========
Denominator for basic income
per share - weighted average
shares outstanding 47,977,000 45,264,000 47,918,000 45,198,000
Effect of employee stock
options (dilutive potential
common shares) 39,000 197,000 22,000 196,000
---------- ---------- ---------- ----------
Denominator for diluted
income per share - adjusted
shares 48,016,000 45,461,000 47,940,000 45,394,000
========== ========== ========== ==========
12. The following table summarizes the Registrant's operations by segment for
the three-month and six-month periods ended June 30, 2003 and 2002.
Three Months Ended June 30, Six Months Ended June 30,
2003 2002 2003 2002
Net sales
Environmental Products $ 88,226,000 $ 70,540,000 $ 172,938,000 $ 145,292,000
Fire Rescue 112,619,000 82,735,000 211,281,000 149,984,000
Safety Products 71,054,000 64,322,000 138,242,000 128,967,000
Tool 39,142,000 40,267,000 80,531,000 79,265,000
----------- ----------- ----------- -----------
Total net sales $ 311,041,000 $ 257,864,000 $ 602,992,000 $ 503,508,000
=========== =========== =========== ===========
Operating income
Environmental Products $ 5,270,000 $ 5,931,000 $ 6,875,000 $ 12,518,000
Fire Rescue 5,393,000 3,551,000 7,516,000 5,220,000
Safety Products 7,904,000 8,831,000 14,434,000 18,098,000
Tool 4,214,000 5,046,000 8,686,000 9,170,000
Corporate expense (3,671,000) (2,957,000) (7,186,000) (5,991,000)
----------- ----------- ----------- -----------
Total operating income 19,110,000 20,402,000 30,325,000 39,015,000
Interest expense (5,140,000) (5,064,000) (10,035,000) (9,847,000)
Minority interest 36,000 (43,000) 209,000 (15,000)
Other income (expense) 62,000 (440,000) 192,000 (286,000)
----------- ----------- ---------- -----------
Income before income taxes $ 14,068,000 $ 14,855,000 $ 20,691,000 $ 28,867,000
=========== =========== =========== ===========
There have been no material changes in total assets from the amount disclosed in
the Registrant's last annual report.
13. The Registrant issues product performance warranties to customers with the
sale of its products. The specific terms and conditions of these
warranties vary depending upon the product sold and country in which the
Registrant conducts business with warranty periods generally ranging from
6 months to 5 years. The Registrant estimates the costs that may be
incurred under its basic limited warranty and records a liability in the
amount of such costs at the time the sale of the related product is
recognized. Factors that affect the Registrant's warranty liability
include the number of units under warranty from time to time, historical
and anticipated rates of warranty claims and costs per claim. The
Registrant periodically assesses the adequacy of its recorded warranty
liabilities and adjusts the amounts as necessary. The Registrant assumed
an estimated $8,438,000 of product performance warranties as a result of
2002 acquisitions. Changes in the Registrant's warranty liabilities for
the six-month periods ended June 30, 2003 and 2002 were as follows:
Six Months Ended
June 30,
2003 2002
---- ----
Balance at January 1 $13,714,000 $ 6,786,000
Provisions to expense 6,765,000 7,670,000
Actual costs incurred (9,953,000) (7,808,000)
---------- ----------
Balance at June 30 $10,526,000 $ 6,648,000
========== ==========
14. In September 2002, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 146, "Accounting for Exit or Disposal Activities." SFAS
No. 146 addresses significant issues regarding the recognition,
measurement and reporting of costs that are associated with exit and
disposal activities, including restructuring activities that were
accounted for under EITF No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity
(Including Certain Costs Incurred in a Restructuring)." The scope of SFAS
No. 146 also includes costs related to terminating a contract that is not
a capital lease and termination benefits that employees who are
involuntarily terminated receive under the terms of a one-time benefit
arrangement that is not an ongoing benefit arrangement or an individual
deferred-compensation contract. The adoption of the provisions of SFAS No.
146 on January 1, 2003 did not have a material impact on the Registrant's
consolidated financial position, results of operations or cash flows.
15. In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires the
recognition of a liability for certain guarantee obligations issued or
modified after December 31, 2002. FIN 45 also clarifies disclosure
requirements to be made by a guarantor for certain guarantees. The
disclosure provisions of FIN 45 were effective for fiscal years ending
after December 15, 2002. The Registrant adopted the disclosure provisions
of FIN 45 as of December 31, 2002 and the accounting requirements on
January 1, 2003, which did not have a material impact on the Registrant's
consolidated financial position, results of operations or cash flows.
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 2003
Comparison with Second Quarter 2002
Diluted earnings per share was $.21 from continuing operations for the second
quarter of 2003 on sales of $311 million. These results compare to the $.24 per
share earned on sales of $258 million in 2002's second quarter. Sales rose 21%
as three of the Registrant's four groups showed significant increases, led by
Fire Rescue Group's 36% increase and the additional sales associated with the
Registrant's refuse truck body acquisitions in late 2002. The $.21 earnings per
share figure reported for 2003 was adversely affected by $.03 per share of
restructuring costs associated primarily with the closure of two manufacturing
facilities. Versus 2002, strong earnings increases in Fire Rescue were more than
offset by declines in the Registrant's other groups reflecting a lower margin
sales mix and these restructuring costs.
Environmental Products sales increased 25% in the quarter to $88 million while
operating margin declined to 6.0% from 8.4%. Sales and orders increased in the
quarter, primarily reflecting the acquisition of two refuse truck body
businesses in late 2002. Although these acquisitions contributed to a
year-over-year sales increase, continued weak demand resulted in low throughput
and cost absorption for these businesses, which adversely affected segment
margins. Although lower than the prior year, second quarter operating margins
improved sequentially from the first quarter for all operating units, including
refuse.
Fire Rescue sales rose 36% to $113 million with operating margins improving to
4.8% from last year's 4.3%. Second quarter sales rose significantly as the group
increased production throughput in its U.S. plants and benefited from higher
international sales. U.S. operating units improved margins and earnings as
production throughput rose and manufacturing efficiencies improved. U.S.
municipal orders declined from the prior year's unusually strong quarter.
Safety Products sales increased 10% to $71 million while operating margin
declined to 11.1% from 13.7% in 2002. Sales and orders rose from prior year,
particularly in the airport parking and municipal vehicular lights and sirens
markets. Operating margins were lower than last year due mainly to costs
associated with the closure of a production facility in the U.K.
Tool sales declined 3% from last year to $39 million. Operating margin fell to
10.8% from 12.5%. Tool Group sales declined as weak U.S. automotive markets
continued to adversely affect cutting tool sales. While strengthening foreign
currencies lifted sales slightly, non-U.S. markets showed real improvements in
weak economies, particularly in Europe, Canada and Japan. Operating margins
declined in light of the lower sales level, higher pension costs and costs
incurred to close a production facility in New York.
Gross margin for the Registrant decreased from 29.0% in the second quarter of
2002 to 26.7% in 2003 primarily due to weak demand in the refuse truck body
business, municipal markets and automotive industry that led to low utilization
of fixed costs as well as a lower margin sales mix and restructuring activities.
Selling, general and administrative expenses as a percent of net sales declined
to 20.6% in the second quarter of 2003 from 21.1% in 2002 due to a combination
of improved production throughput and effective cost management.
Interest expense was essentially flat with the prior year. During the quarter,
the Registrant successfully replaced its $300 million bank credit facility, a
portion of which expired in June, with a combination of commercial bank and
private placement financing. A new 3-year bank commitment for $250 million was
closed on June 6th. A $50 million floating rate private placement was completed
on June 30th; terms range from 5-10 years. Both transactions were
oversubscribed.
The effective tax rate increased slightly from 28% last year to 29% reflecting
the estimated tax rate for the balance of the year. The full-year effective tax
rate is expected to be about 27%; this includes the first quarter effect of a
one-time benefit of a tax deduction associated with the closure of a production
facility in the U.K.
The Registrant also completed the sale of its discontinued sign operations
during the quarter and recorded an after-tax charge of $.4 million, which
includes an estimate of future costs associated with retained liabilities.
Proceeds were used to pay down debt.
Comparison of First Six Months 2003 to Same Period 2002
Diluted earnings per share from continuing operations for the first six months
of 2003 was $.34 on sales of $603 million. This compares to earnings per share
of $.45 in the first six months of 2002 on sales of $504 million. Although sales
increased 20% in 2003, earnings declined, reflecting a sales shift within the
Environmental Products and Safety Products groups, and costs associated with the
manufacturing facilities shutdowns.
Gross margin for the Registrant decreased to 26.1% in the first six months of
2003 from 28.7% in 2002 primarily due to weak demand from municipal, refuse
truck body and automotive customers coupled with a lower margin sales mix and
restructuring activities. Selling, general and administrative expenses as a
percent of net sales were 21.1% in the first half of 2003, essentially even with
the 21.0% last year. Interest expense increased slightly to $10.0 million from
$9.8 million as a result of the refuse truck body acquisitions partially offset
by the lower interest rate environment. The effective tax rate of 20.7% for the
first six months of 2003 declined from 29.0% in 2002 primarily due to a one-time
benefit of a tax deduction associated with the closure of a production facility
in the U.K.
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 and fire rescue products.
Financial Position and Liquidity at June 30, 2003
Operating cash flow totaled $47 million year to date. Days sales of receivables
outstanding and inventory turnover both improved during the quarter, as did
payables management. During the quarter, inventory turns improved to 4.8, up
from an average of 4.3 in 2002, due to improvements associated with lean
enterprise initiatives. Compared to the first six months of 2002, operating cash
flow was $10 million lower, in large part, because of a significant reduction in
customer receivables during the comparable period of 2002. Manufacturing debt
was reduced in the quarter to $274 million, or 42% of capitalization, comparing
favorably to the 44% level at year-end 2002.
Current financial resources and anticipated funds from the Registrant's
operations are expected to be adequate to meet future cash requirements.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures
As required by Rule 13a-15 under the Securities Exchange Act of 1934, the
Registrant carried out an evaluation under the supervision and with the
participation of the Registrant's management, including the Chief Executive
Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the
design and operation of the disclosure controls and procedures as of June 30,
2003. Based upon that evaluation, the management, including the CEO and CFO,
concluded that the disclosure controls and procedures were effective to ensure
that information required to be disclosed by the Registrant in the reports it
files or submits under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. In connection with the rules and as a matter of
practice, the Registrant continues to review and document disclosure controls
and procedures, including internal controls and procedures for financial
reporting. From time to time, the Registrant may make changes aimed at enhancing
the effectiveness of the controls and to ensure that the systems evolve with the
business. There have been no significant changes in the internal controls or in
other factors that could significantly affect internal controls subsequent to
the date the Registrant carried out its evaluation.
Changes in internal controls
None.
Part II. Other Information
Responses to items two, three and four are omitted since these items are either
inapplicable or the response thereto would be negative.
Item 1. Legal Proceedings
Footnote 10 of the financial statements included in Part I of this Form 10-Q is
incorporated herein by reference.
Item 5. Other Information
The Registrant has two directors that qualify as financial experts, as defined
in the Sarbanes-Oxley Act and Securities and Exchange Commission regulations, on
its Audit Committee. They are Ms. Joan E. Ryan, Senior Vice President and Chief
Financial Officer of SIRVA, Inc., and Mr. Charles R. Campbell, Chairman of the
Audit Committee, a principal in The Everest Group and formerly Senior Vice
President and Chief Financial and Administrative Officer of the Registrant until
1995.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 31.1 -- CEO Certification under Section 302 of the Sarbanes-Oxley Act
Exhibit 31.2 -- CFO Certification under Section 302 of the Sarbanes-Oxley Act
Exhibit 32.1 -- CEO Certification of Periodic Report under Section 906 of the
Sarbanes-Oxley Act
Exhibit 32.2 -- CFO Certification of Periodic Report under Section 906 of the
Sarbanes-Oxley Act
(b) Reports on Form 8-K filed during the quarter ended June 30, 2003:
A Form 8-K was filed on April 18, 2003, under Item 9, reporting that the
Registrant (i) had been taken off credit watch by Standard and Poor's and (ii)
confirmed first quarter 2003 earnings guidance.
A Form 8-K was filed on April 18, 2003, under Item 9, reporting that the
Registrant's Board of Directors declared a regular cash dividend of 20 cents on
its common stock.
A Form 8-K was filed on April 28, 2003, under Items 7 and 9, reporting the
Registrant's press release dated April 22, 2003 that disclosed its financial
results for the first quarter ended March 31, 2003.
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
8/14/03 By: /s/ Stephanie K. Kushner
Date Stephanie K. Kushner, Vice President and Chief
Financial Officer