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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 September 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 47,982,000 shares outstanding at October 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.
2
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
2003 2002 2003 2002
---- ---- ---- ----
Net sales $ 287,810,000 $ 261,615,000 $ 890,802,000 $ 765,123,000
Costs and expenses:
Cost of sales (209,764,000) (187,553,000) (655,316,000) (546,424,000)
Selling, general and
administrative (61,329,000) (52,474,000) (188,444,000) (158,096,000)
----------- ----------- ----------- -----------
Operating income 16,717,000 21,588,000 47,042,000 60,603,000
Interest expense (5,132,000) (4,739,000) (15,167,000) (14,586,000)
Other income (expense),
net 212,000 (1,251,000) 404,000 (1,537,000)
Minority interest 3,000 40,000 212,000 25,000
----------- ----------- ----------- -----------
Income from continuing
operations before income
taxes 11,800,000 15,638,000 32,491,000 44,505,000
Income taxes (1,861,000) (3,145,000) (6,138,000) (11,506,000)
----------- ----------- ----------- -----------
Income from continuing
operations 9,939,000 12,493,000 26,353,000 32,999,000
Loss on disposal of
discontinued operations,
net of tax benefit
of $222,000 (369,000)
Cumulative effect of
change in accounting (7,984,000)
----------- ----------- ----------- -----------
Net income $ 9,939,000 $ 12,493,000 $ 25,984,000 $ 25,015,000
=========== =========== =========== ===========
COMMON STOCK DATA:
Basic and diluted net
income per share:
Income from continuing
operations $.21 $.28 $.55 $.73
Loss on disposal of
discontinued operations (.01)
Cumulative effect of
change in accounting (.18)
--- --- --- ---
Net income* $.21 $.28 $.54 $.55
=== === === ===
Weighted average common
shares outstanding
Basic 47,977,000 45,305,000 47,938,000 45,223,000
Diluted 48,051,000 45,358,000 47,977,000 45,371,000
Cash dividends per share
of common stock $.20 $.20 $.60 $.60
* amounts above may not add due to rounding
See notes to condensed consolidated financial statements.
3
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
2003 2002 2003 2002
---- ---- ---- ----
Net income $ 9,939,000 $ 12,493,000 $ 25,984,000 $ 25,015,000
Other comprehensive income
(loss), net of tax -
Foreign currency
translation adjustments 807,000 (394,000) 7,336,000 5,033,000
Net derivative gain
(loss), cash flow hedges (466,000) (575,000) 1,821,000 (1,188,000)
---------- ---------- ---------- ----------
Comprehensive income $ 10,280,000 $ 11,524,000 $ 35,141,000 $ 28,860,000
========== ========== ========== ==========
See notes to condensed consolidated financial statements.
4
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2003 2002 (a)
------------- -------------
(Unaudited)
ASSETS
Manufacturing activities -
Current assets:
Cash and cash equivalents $ 7,631,000 $ 9,782,000
Trade accounts receivable, net of allowances
for doubtful accounts 204,166,000 181,843,000
Inventories:
Raw materials 65,317,000 68,879,000
Work in process 61,503,000 63,971,000
Finished goods 55,405,000 50,952,000
Prepaid expenses 15,531,000 19,390,000
--------------- ---------------
Total current assets 409,553,000 394,817,000
Properties and equipment:
Land 6,378,000 6,251,000
Buildings and improvements 61,706,000 69,359,000
Machinery and equipment 237,708,000 233,677,000
Accumulated depreciation (180,888,000) (165,355,000)
--------------- ---------------
Net properties and equipment 124,904,000 143,932,000
--------------- ---------------
Goodwill, net of accumulated amortization 362,038,000 348,435,000
Other deferred charges and assets 63,602,000 44,046,000
--------------- ---------------
Total manufacturing assets 960,097,000 931,230,000
Net assets of discontinued operations, including
financial assets 10,392,000
Financial services activities - Lease financing
receivables, net of allowances for doubtful
accounts 227,875,000 226,788,000
--------------- ---------------
Total assets $ 1,187,972,000 $ 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.
5
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS -- Continued
September 30, December 31,
2003 2002 (a)
------------- -----------
(Unaudited)
LIABILITIES
Manufacturing activities -
Current liabilities:
Short-term borrowings $ 72,216,000 $ 16,432,000
Trade accounts payable 88,393,000 76,082,000
Customer deposits 25,949,000 28,326,000
Accrued liabilities and income taxes 119,516,000 101,044,000
--------------- ---------------
Total current liabilities 306,074,000 221,884,000
Long-term borrowings 198,222,000 279,544,000
Long-term pension and other liabilities 39,161,000 32,656,000
Deferred income taxes 36,157,000 33,495,000
--------------- ---------------
Total manufacturing liabilities 579,614,000 567,579,000
--------------- ---------------
Financial services activities -- Borrowings 199,391,000 202,022,000
Minority interest in subsidiary 532,000 744,000
SHAREHOLDERS' EQUITY
Common stock -- par value 48,419,000 48,394,000
Capital in excess of par value 91,193,000 91,114,000
Retained earnings 310,885,000 313,684,000
Treasury stock (14,835,000) (18,026,000)
Deferred stock awards (2,419,000) (3,136,000)
Accumulated other comprehensive loss (24,808,000) (33,965,000)
--------------- ---------------
Total shareholders' equity 408,435,000 398,065,000
--------------- ---------------
Total liabilities and shareholders' equity $ 1,187,972,000 $ 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.
6
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended September 30,
2003 2002
---- ----
Operating activities:
Net income $ 25,984,000 $ 25,015,000
Cumulative effect of change in accounting 7,984,000
Loss on disposal of discontinued operations 369,000
Depreciation 18,018,000 15,639,000
Amortization 1,676,000 1,622,000
Working capital changes and other 11,460,000 27,105,000
------------- -------------
Net cash provided by operating activities 57,507,000 77,365,000
Investing activities:
Purchases of properties and equipment (12,498,000) (12,931,000)
Principal extensions under lease financing agreements (122,806,000) (117,992,000)
Principal collections under lease financing agreements 121,613,000 125,661,000
Payment for purchases of companies, net of cash acquired (10,479,000)
Proceeds from sale of discontinued operations 7,453,000
Other, net (1,255,000) (2,490,000)
------------- -------------
Net cash used for investing activities (7,493,000) (18,231,000)
Financing activities:
Decrease in short-term borrowings, net (68,771,000) (35,849,000)
Increase (decrease) in long-term borrowings 44,629,000 (2,418,000)
Purchases of treasury stock (117,000) (4,328,000)
Cash dividends paid to shareholders (28,737,000) (26,921,000)
Other, net 831,000 1,781,000
------------- -------------
Net cash used for financing activities (52,165,000) (67,735,000)
Decrease in cash and cash equivalents (2,151,000) (8,601,000)
Cash and cash equivalents at beginning of period 9,782,000 16,882,000
------------- -------------
Cash and cash equivalents at end of period $ 7,631,000 $ 8,281,000
============= =============
See notes to condensed consolidated financial statements.
7
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 nine months ended September 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 nine-month periods ended September 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.
Nine Months Ended
September 30,
2003 2002
---- ----
Reported net income $25,984,000 $25,015,000
Deduct: Total stock-based employee
compensation expense determined under
the fair-value method for all awards,
net of related tax effects (595,000) (787,000)
---------- ----------
Pro forma net income $25,389,000 $24,228,000
========== ==========
Basic net income per common share:
Reported net income $.54 $.55
Pro forma net income $.53 $.54
Diluted net income per share:
Reported net income $.54 $.55
Pro forma net income $.53 $.53
The Registrant recorded stock-based employee compensation expense of
$1,019,000 and $1,155,000 for the nine months ended September 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 nine-month periods ended September 30, 2003 and 2002
was $13,781,000 and $13,598,000, respectively. Income taxes paid for these
same periods were $3,260,000 and $5,785,000, respectively.
5. The Registrant's effective tax rates were 18.9% and 25.9% for the
nine-month periods ended September 30, 2003 and 2002, respectively. The
rate reduction is due to 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 and a higher proportion of tax-free
municipal income in 2003.
6. In September 2002, the Registrant acquired Leach Company ("Leach"), a
leading manufacturer of rear load refuse collection bodies located in
Oshkosh, Wisconsin. Leach, whose market strength is primarily in government
and municipal markets, utilizes a dealer channel similar to other
Environmental Products Group operations. In October 2002, the Registrant
also acquired Wittke, Inc. ("Wittke"), a manufacturer of dynamic
truck-mounted refuse collection equipment located in Medicine Hat, Alberta
and Kelowna, British Columbia. Wittke brand products include front load,
side load and automated side load
8
refuse truck bodies. Wittke sold direct to customers at the time of
acquisition, and is particularly strong in the private contractors and
large waste hauling company market segments. The Registrant acquired Leach
and Wittke using a combination of cash and stock totaling $101,260,000. As
a result of these acquisitions in 2002, the Registrant recorded $12,733,000
of working capital, $19,600,000 of fixed and other long-term assets,
$5,660,000 of intangible assets, $3,163,000 of restructuring costs incurred
in connection with the shut down of an acquired, non-strategic components
facility, $8,080,000 of long-term liabilities and $74,510,000 of goodwill.
The Registrant also assumed $10,500,000 in debt.
7. 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 therefore recognized as a charge to
net income as a cumulative effect of a change in accounting in 2002. 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 nine months ended
September 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
Adjustments 9,461,000 9,461,000
Translation 400,000 2,165,000 1,445,000 132,000 4,142,000
----------- ---------- ----------- ---------- -----------
Goodwill balance
September 30,
2003 $138,718,000 $39,095,000 $101,430,000 $82,795,000 $362,038,000
=========== ========== =========== ========== ===========
The adjustments reflect the finalization of property, equipment and
intangible appraisals, restructuring plans and warranty campaigns relating
to the 2002 acquisitions of Leach and Wittke.
The components of the Registrant's other intangible assets as of September
30, 2003 are as follows:
Weighted- Gross Net
Average Carrying Accumulated Carrying
Useful Life Value Amortization Value
----------- ----- ------------ -----
(Years)
Amortizable:
Customer relationships 20 $1,850,000 (93,000) $1,757,000
Distribution network 40 1,300,000 (32,000) 1,268,000
Non-amortizable:
Tradenames 2,510,000 2,510,000
--------- -------- ---------
Total $5,660,000 $(125,000) $5,535,000
========= ======== =========
Amortization expense for the nine months ended September 30, 2003 totaled
$125,000. The estimated aggregate amortization expense for the next five
years is as follows: $31,000 in 2003 (remaining three months), $125,000 in
2004, $125,000 in 2005, $125,000 in 2006, $125,000 in 2007, $125,000 in
2008 and $2,369,000 thereafter.
8. 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 nine months ended September 30, 2003 and 2002 were $12,844,000 and
$31,938,000, respectively. The Registrant retained certain assets and
liabilities in conjunction with the sale.
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
$4,600,000 for the nine month period ended September 30, 2003. These
charges are primarily aggregated within selling, general and administrative
expenses. A nominal amount of these costs remain unpaid as of September 30,
2003.
9
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 three 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 September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2003 2002 2003 2002
---- ---- ---- ----
Numerators for both basic and
diluted income per share
computations:
Income from continuing
operations $ 9,939,000 $ 12,493,000 $ 26,353,000 $ 32,999,000
Loss from discontinued
operations, net of tax (369,000)
Cumulative effect of change
in accounting (7,984,000)
---------- ---------- ---------- ----------
Net income $ 9,939,000 $ 12,493,000 $ 25,984,000 $ 25,015,000
========== ========== ========== ==========
Denominator for basic income
per share -- weighted average
shares outstanding 47,977,000 45,305,000 47,938,000 45,223,000
Effect of employee stock
options (dilutive potential
common shares) 74,000 53,000 39,000 148,000
---------- ---------- ---------- ----------
Denominator for diluted income
per share -- adjusted shares 48,051,000 45,358,000 47,977,000 45,371,000
========== ========== ========== ==========
10
12. The following table summarizes the Registrant's operations by segment for
the three-month and nine-month periods ended September 30, 2003 and 2002.
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2003 2002 2003 2002
---- ---- ---- ----
Net sales
Environmental Products $ 88,014,000 $ 68,551,000 $ 260,952,000 $ 213,843,000
Fire Rescue 91,718,000 87,717,000 302,999,000 237,701,000
Safety Products 69,748,000 66,263,000 207,990,000 195,230,000
Tool 38,330,000 39,084,000 118,861,000 118,349,000
------------- ------------- ------------- -------------
Total net sales $ 287,810,000 $ 261,615,000 $ 890,802,000 $ 765,123,000
============= ============= ============= =============
Operating income
Environmental Products $ 5,308,000 $ 6,189,000 $ 12,183,000 $ 18,707,000
Fire Rescue 1,225,000 3,127,000 8,741,000 8,347,000
Safety Products 9,605,000 10,047,000 24,039,000 28,145,000
Tool 3,511,000 5,294,000 12,197,000 14,464,000
Corporate expense (2,932,000) (3,069,000) (10,118,000) (9,060,000)
------------- ------------- ------------- -------------
Total operating income 16,717,000 21,588,000 47,042,000 60,603,000
Interest expense (5,132,000) (4,739,000) (15,167,000) (14,586,000)
Other income (expense) 212,000 (1,251,000) 404,000 (1,537,000)
Minority interest 3,000 40,000 212,000 25,000
------------- ------------- ------------- -------------
Income before income taxes $ 11,800,000 $ 15,638,000 $ 32,491,000 $ 44,505,000
============= ============= ============= =============
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 $13,134,000 of product
performance warranties as a result of 2002 acquisitions. Changes in the
Registrant's warranty liabilities for the nine-month periods ended
September 30, 2003 and 2002 were as follows:
Nine Months Ended
September 30,
-----------------------------
2003 2002
---- ----
Balance at January 1 $13,714,000 $ 6,786,000
Provisions to expense 10,308,000 8,133,000
Actual costs incurred (16,454,000) (8,113,000)
Business acquisitions 4,696,000 50,000
---------- ----------
Balance at September 30 $12,264,000 $ 6,856,000
========== ==========
The 2003 adjustments reflect the revised estimate of the warranty liability
relating to the 2002 acquisitions of Leach and Wittke.
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.
11
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.
12
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 2003
Comparison with Third Quarter 2002
Diluted earnings per share was $.21 from continuing operations for the third
quarter of 2003 on sales of $288 million. These results compare to the $.28 per
share earned on sales of $262 million in 2002's third quarter. Sales increased
10% as a result of refuse truck body acquisitions in late 2002 and also
benefited from the currency translation relative to stronger European and
Canadian currencies. Operating margins were lower in all groups, reflecting a
lower margin sales mix in several segments.
Environmental Products sales and orders increased 28% in the quarter, in large
part due to the effects of the acquisitions of two refuse truck body businesses
in late 2002. Street sweeper orders were flat with last year, while sales rose
3% due to higher shipments in Europe. The operating margin declined from 9.0% to
6.0% mainly due to the results of the refuse truck business and also lower
finance revenues from leasing activities within the group.
Refuse truck operating profits improved sequentially with each quarter of 2003;
however, the margins remain well below the group average. The refuse truck
business continues to experience weak demand in both municipal and industrial
markets. A build-up in sales through the newly-established dealer channel has
only partially compensated for the generally weaker marketplace. The low sales
volumes resulted in reduced throughput and cost absorption, therefore lowering
operating margins.
As part of its strategic assessment and alignment of the refuse truck business
with its other group operating units, the Registrant recently implemented a
significant restructuring of its refuse truck workforce in Canada and the U.S.,
including an announced planned exit of a components production facility in
Kelowna, British Columbia. At the reduced employment and fixed cost levels, the
business expects volume and margins to improve as markets recover and dealer
sales grow.
The Registrant received a signed letter of intent to negotiate a new three-year
contract to supply front-loading refuse truck bodies to Waste Management
beginning in 2004. Upon execution of the new agreement, the Registrant will
remain a key supplier to Waste Management for its Canadian and Western U.S.
requirements, although absent a significant economic recovery, total volumes
supplied to this customer under this prospective contract will likely be
materially reduced.
Fire Rescue third quarter orders totaled $83 million, down 10% sequentially and
22% versus the prior year. The reduction from 2002 reflected weaker U.S.
municipal and governmental orders (down 8%), and the timing on international
orders at the Registrant's Finland-based operation, which are even with the
prior year for the nine-month period. Third quarter sales increased 5% to $92
million due to additional volumes of pass-through equipment sales associated
with deliveries from the Registrant's Finland-based operation under a large
contract with Brazil. Excluding these pass-through sales, segment revenues
declined slightly, due to lower sales of aerial units and custom pumpers, partly
offset by increased sales of rescue units. Operating earnings declined from the
prior year, as increases at the Registrant's European operations were more than
offset by an adverse sales mix and higher costs at our U.S. operations. Lower
U.S. earnings were partly attributable to production disruptions following a
realignment of the Registrant's Ocala, Florida based production facilities to
accommodate a plant closure early next year. Also adversely affecting earnings
were higher operating expenses associated in part with strategic initiatives.
Safety Products orders declined significantly from last year, which included the
booking of the initial $19 million portion of the Dallas/Ft. Worth International
Airport parking project; absent this project, orders were flat. Sales increased
5% from the prior year to $70 million, with airport parking and European
municipal vehicular lights and sirens showing gains. Sales also benefited from
currency translation effects and pass-through installation and shipping costs
which were at low margins. Operating margins averaged 13.8%, a decline from last
year's third quarter, reflecting these lower margin sales as well as increased
pension and medical costs in the quarter. Operating margin improved sequentially
from the second quarter, which included restructuring costs associated with the
closure of a U.K.-based business.
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Tool sales declined 2% as weak U.S. automotive markets continued to adversely
affect cutting tool sales. Precision punch and die component sales showed
improvement, in part due to strengthening foreign currencies. Operating margins
declined to 9.2% in light of the lower sales level and continued higher pension
costs, and were also impacted by an unfavorable charge relating to inventory
valuation.
Gross margin for the Registrant decreased from 28.3% in the second quarter of
2002 to 27.1% in 2003 primarily due to continued 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, production
disruptions at the Registrant's Ocala, Florida facility in anticipation of a
plant closure in 2004 and higher pension costs. Selling, general and
administrative expenses as a percent of net sales increased to 21.3% in the
second quarter of 2003 from 20.1% in 2002 primarily due to higher pass-through
commissions under a large fire truck contract with Brazil and strategic
initiatives undertaken in the Fire Rescue Group.
Interest expense increased 8% from the prior year due to higher average debt
balances as a result of the refuse truck body acquisitions in 2002. The
effective tax rate declined to 16% from last year's 20% reflecting the higher
relative impact of tax credits and tax-free municipal income. The full-year
effective tax rate is expected to be about 22%; the full-year rate also 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.
Comparison of First Nine Months 2003 to Same Period 2002
Diluted earnings per share from continuing operations totaled $.55 on sales of
$891 million. In the first nine months of 2002, sales aggregated $765 million
and earnings per share were $.73. The increase in sales was largely associated
with the refuse truck business acquisitions and high initial fire rescue
backlogs. Despite higher sales, earnings declined due to a less favorable sales
mix in several groups, costs associated with manufacturing facility shutdowns
and the expenses associated with headcount reductions in all groups.
Gross margin for the Registrant decreased to 26.4% in the first nine months of
2003 from 28.6% in 2002 primarily due to weak demand from municipal, refuse
truck body and automotive customers coupled with a lower margin sales mix,
restructuring activities and higher pension costs. Selling, general and
administrative expenses as a percent of net sales increased to 21.2% in the
first nine months of 2003 from 20.7% in 2002 primarily due to higher
pass-through commissions partially offset by effective cost management. Interest
expense increased to $15.2 million from $14.6 million as a result of increased
debt due to the refuse truck body acquisitions partially offset by the lower
interest rate environment. The effective tax rate of 18.9% for the first nine
months of 2003 declined from 25.9% in 2002 due to a one-time benefit of a tax
deduction associated with the closure of a production facility in the U.K. and a
higher proportion of tax-free municipal 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 and fire rescue products.
Financial Position and Liquidity at September 30, 2003
Operating cash flow aggregated $58 million year to date. Compared to the first
nine months of 2002, operating cash flow, though strong, was $20 million lower
than the prior year. During the quarter, the company made a $4 million
discretionary contribution to its pension funds. While inventory productivity
continued to show improvement, outstanding receivables rose in light of the
disproportionate increase in foreign sales with longer payment terms and the mix
of customer sales. The Registrant expects to generate approximately $75-80
million of operating cash flow in 2003.
Manufacturing debt was again reduced in the quarter; now at $270 million,
manufacturing debt represented 42% of capitalization, down from 44% at the
beginning of the year, and up slightly from 41% a year ago.
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ITEM 4. CONTROLS AND PROCEDURES
(a) 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 September
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.
(b) 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
Mr. Robert M. Gerrity and Mr. Robert S. Hamada have been appointed to the
Registrant's Board of Directors. Mr. James A. Lovell, Jr. retired from the
Registrant's Board of Directors, having served for 19 years.
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 3(ii) -- By-Laws of Federal Signal Corporation, as amended
October 17, 2003
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 September 30, 2003:
A Form 8-K was filed on July 23, 2003, under Items 7 and 9, reporting the
Registrant's press release dated July 22, 2003 that disclosed its financial
results for the second quarter ended June 30, 2003.
A Form 8-K was filed on September 26, 2003, under Items 5 and 7, reporting that
the Registrant reduced its earnings guidance for the third quarter to $.20 to
$.22 per share from the previous estimate of $.29 to $.33 provided in July 2003
as a result of
15
lower than expected demand from U.S. municipal customers, lower production at
U.S. Fire Rescue operations and delays in installation of key airport parking
systems.
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
11/14/03 By: /s/ Stephanie K. Kushner
- -------- -----------------------------------------------
Date Stephanie K. Kushner, Vice President and Chief
Financial Officer
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