Back to GetFilings.com
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 March 31, 2004
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 by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b of the Exchange Act). 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 48,115,708 shares outstanding at April 30, 2004
FEDERAL SIGNAL CORPORATION
INDEX TO FORM 10-Q
Page
----
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Income for the Three Months Ended
March 31, 2004 and 2003.................................................................. 4
Condensed Consolidated Statements of Comprehensive Income for the
Three Months Ended March 31, 2004 and 2003............................................... 5
Condensed Consolidated Balance Sheets as of March 31, 2004 and
December 31, 2003........................................................................ 6
Condensed Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 2004 and 2003.................................................................. 8
Notes to Condensed Consolidated Financial Statements....................................... 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................. 19
Item 4. Controls and Procedures.................................................................... 19
Part II. Other Information
Item 1. Legal Proceedings............................................................................ 20
Item 6. Exhibits and Reports on Form 8-K............................................................. 20
Signature..................................................................................................... 21
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Forward-Looking Statements
This Form 10-Q, reports filed by the Registrant with the Securities and Exchange
Commission ("SEC") and comments made by management contain the words such as
"may," "will," "believe," "expect," "anticipate," "intend," "plan," "project,"
"estimate" and "objective" or the negative thereof or similar terminology
concerning the Registrant's future financial performance, business strategy,
plans, goals and objectives. These expressions are intended to identify
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements include information
concerning the Registrant's possible or assumed future performance or results of
operations and are not guarantees. While these statements are based on
assumptions and judgments that management has made in light of industry
experience as well as perceptions of historical trends, current conditions,
expected future developments and other factors believed to be appropriate under
the circumstances, they are subject to risks, uncertainties and other factors
that may cause the Registrant's actual results, performance or achievements to
be materially different.
Risks, uncertainties and other factors that may impact the achievement of
forward-looking statements include the cyclical nature of the U.S. state and
municipal markets, success of research and development projects, negotiation and
maintenance of strong supplier strategic alliances, risks associated with
international operations such as foreign currency fluctuations and economic and
political conditions, identification and integration of acquisitions, pricing
pressures, competition, operational efficiencies and cost reductions, cash and
debt management including interest rate swaps, tax strategies, maintenance and
growth of the dealer network and customer relationships.
ADDITIONAL INFORMATION
The Registrant makes its annual reports on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K and amendments to those reports available,
free of charge, through its Internet website (http://www.federalsignal.com) as
soon as reasonably practical after it electronically files or furnishes such
materials to the SEC. All of the Registrant's filings may be read or copied at
the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549.
Information on the operation of the Public Filing Room can be obtained by
calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet website
(http://www.sec.gov) that contains reports, proxy and information statements and
other information regarding issuers that file electronically.
3
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three months ended March 31,
-------------------------------
2004 2003
------------- -------------
Net sales $ 276,518,000 $ 291,951,000
Costs and expenses:
Cost of sales (209,060,000) (217,602,000)
Selling, general and
administrative (58,590,000) (63,134,000)
------------- -------------
Operating income 8,868,000 11,215,000
Interest expense (4,865,000) (4,895,000)
Other income (expense), net (970,000) 130,000
Minority interest (57,000) 173,000
------------- -------------
Income before income taxes 2,976,000 6,623,000
Income taxes (777,000) (156,000)
------------- -------------
Net income $ 2,199,000 $ 6,467,000
============= =============
COMMON STOCK DATA:
Basic and diluted net income per share $ .05 $ .14
Weighted average common
shares outstanding
Basic 48,026,000 47,859,000
Diluted 48,117,000 47,864,000
Cash dividends per share
of common stock $ .10 $ .20
See notes to condensed consolidated financial statements.
4
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
Three months ended March 31,
2004 2003
----------- -----------
Net income $ 2,199,000 $ 6,467,000
Other comprehensive income
(loss), net of tax -
Foreign currency
translation adjustments (2,116,000) 3,039,000
Net derivative gain (loss),
cash flow hedges (861,000) 1,443,000
----------- ------------
Comprehensive income (loss) $ (778,000) $ 10,949,000
=========== ============
See notes to condensed consolidated financial statements.
5
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2004 2003 (a)
--------------- ---------------
(Unaudited)
ASSETS
Manufacturing activities -
Current assets:
Cash and cash equivalents $ 2,038,000 $ 10,119,000
Trade accounts receivable, net of allowances
for doubtful accounts 181,591,000 196,356,000
Inventories:
Raw materials 67,149,000 65,865,000
Work in process 79,045,000 63,708,000
Finished goods 50,594,000 51,115,000
Prepaid expenses 18,738,000 16,389,000
--------------- ---------------
Total current assets 399,155,000 403,552,000
Properties and equipment:
Land 6,023,000 6,070,000
Buildings and improvements 63,152,000 63,292,000
Machinery and equipment 246,820,000 244,615,000
Accumulated depreciation (192,820,000) (188,404,000)
--------------- ---------------
Net properties and equipment 123,175,000 125,573,000
--------------- ---------------
Goodwill 365,537,000 366,414,000
Other deferred charges and assets 61,616,000 60,759,000
--------------- ---------------
Total manufacturing assets 949,483,000 956,298,000
Financial services activities - Lease financing
receivables, net of allowances for doubtful
accounts 224,745,000 230,111,000
--------------- ---------------
Total assets $ 1,174,228,000 $ 1,186,409,000
=============== ===============
See notes to condensed consolidated financial statements.
(a) The balance sheet at December 31, 2003 has been derived from the audited
financial statements at that date.
6
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS -- Continued
March 31, December 31,
2004 2003 (a)
--------------- ---------------
(Unaudited)
LIABILITIES
Manufacturing activities -
Current liabilities:
Short-term borrowings $ 68,382,000 $ 70,837,000
Trade accounts payable 81,751,000 82,525,000
Customer deposits 28,596,000 21,224,000
Accrued liabilities and income taxes 105,162,000 109,784,000
--------------- ---------------
Total current liabilities 283,891,000 284,370,000
Long-term borrowings 199,898,000 194,130,000
Long-term pension and other liabilities 36,775,000 38,692,000
Deferred income taxes 39,010,000 44,820,000
--------------- ---------------
Total manufacturing liabilities 559,574,000 562,012,000
--------------- ---------------
Financial services activities - Borrowings 196,652,000 201,347,000
Minority interest in subsidiary 598,000 541,000
SHAREHOLDERS' EQUITY
Common stock - par value 48,524,000 48,439,000
Capital in excess of par value 93,190,000 91,898,000
Retained earnings 314,792,000 317,404,000
Treasury stock (14,850,000) (14,850,000)
Deferred stock awards (3,202,000) (2,309,000)
Accumulated other comprehensive loss (21,050,000) (18,073,000)
--------------- ---------------
Total shareholders' equity 417,404,000 422,509,000
--------------- ---------------
Total liabilities and shareholders' equity $ 1,174,228,000 $ 1,186,409,000
=============== ===============
See notes to condensed consolidated financial statements.
(a) The balance sheet at December 31, 2003 has been derived from the audited
financial statements at that date.
7
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three months ended March 31,
-----------------------------
2004 2003
------------ ------------
Operating activities:
Net income $ 2,199,000 $ 6,467,000
Depreciation and amortization 5,997,000 6,585,000
Pension contribution (3,604,000)
Working capital changes and other (2,557,000) 4,848,000
------------ ------------
Net cash provided by operating activities 2,035,000 17,900,000
Investing activities:
Purchases of properties and equipment (4,272,000) (4,489,000)
Principal extensions under lease financing agreements (33,546,000) (39,276,000)
Principal collections under lease financing agreements 38,912,000 38,419,000
Other, net 1,466,000 1,193,000
------------ ------------
Net cash provided by (used for) investing
activities 2,560,000 (4,153,000)
Financing activities:
Increase (decrease) in short-term borrowings, net (7,150,000) 158,000
Increase (decrease) in long-term borrowings, net 158,000 (4,326,000)
Purchases of treasury stock (116,000)
Cash dividends paid to shareholders (4,780,000) (9,548,000)
Other, net (904,000) (260,000)
------------ ------------
Net cash used for financing activities (12,676,000) (14,092,000)
------------ ------------
Decrease in cash and cash equivalents (8,081,000) (345,000)
Cash and cash equivalents at beginning of period 10,119,000 9,782,000
------------ ------------
Cash and cash equivalents at end of period $ 2,038,000 $ 9,437,000
============ ============
Supplemental disclosures:
Cash paid for interest $ 2,304,000 $ 373,000
Cash paid for income taxes 989,000 911,000
See notes to condensed consolidated financial statements.
8
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. BASIS OF PRESENTATION
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 ("SEC").
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. These consolidated condensed financial statements should
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, 2003.
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 ended
March 31, 2004 are not necessarily indicative of the results to be
expected for the full year of 2004.
Effective January 1, 2004, the Registrant began reporting its
interim quarterly periods on a 13-week basis ending on a Saturday
with the fiscal year ending on December 31. Prior to 2004, the
Registrant's interim quarterly periods ended on March 31, June 30,
September 30 and December 31 year end. For convenience purposes, the
Registrant uses "March 31, 2004" to refer to its financial results
as of April 3, 2004 and for the 13-week period ended April 3, 2004.
2. STOCK-BASED COMPENSATION PLANS
The following table illustrates the effect on net income and
earnings per share for the three-month periods ended March 31, 2004
and 2003 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.
Three months ended
March 31,
----------------------------
2004 2003
------------ ------------
Reported net income $ 2,199,000 $ 6,467,000
Add: Stock-based employee compensation
expense included in reported net
income, net of related tax effects 145,000 281,000
Deduct: Total stock-based employee
compensation expense determined under
the fair-value method for all awards,
net of related tax effects (902,000) (476,000)
------------ ------------
Pro forma net income $ 1,442,000 $ 6,272,000
============ ============
Basic net income per common share:
Reported net income $ .05 $ .14
Pro forma net income $ .03 $ .13
Diluted net income per share:
Reported net income $ .05 $ .14
Pro forma net income $ .03 $ .13
The stock-based employee compensation expense determined under the
fair-value method for the three months ended March 31, 2004 was
affected by the retirement and separation agreements relating to two
executive officers.
9
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.
3. INCOME TAXES
The Registrant's effective tax rate totaled 26.1% and 2.4% for the
three-month periods ended March 31, 2004 and 2003, respectively. A
$1,863,000 tax benefit was recorded for the three months ended March
31, 2003 associated with the closure of a production facility in the
United Kingdom.
4. POSTRETIREMENT BENEFITS
The components of the Registrant's net periodic pension expense for
its U.S. benefit plans are summarized as follows:
Three months ended
March 31,
----------------------------
2004 2003
------------ ------------
Service cost $ 1,175,000 $ 1,022,000
Interest cost 1,929,000 1,776,000
Expected return on plan assets (1,990,000) (1,961,000)
Amortization of transition amount (58,000) (58,000)
Other 410,000 229,000
------------ ------------
Net periodic pension expense $ 1,466,000 $ 1,008,000
============ ============
The Registrant contributed $3,000,000 to its U.S. benefit plans and
$604,000 to its non-U.S. benefit plans during the first quarter of
2004. In April 2004, the Registrant contributed an additional
$405,000 to its U.S. benefit plans; it does not anticipate any
further funding in 2004.
In December 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the "Act") became law. The Act introduced
a prescription drug benefit under Medicare and a federal subsidy to
sponsors of certain retiree health care benefit plans. The Act did
not and will not have a material impact on the Registrant's
accumulated postretirement obligations, results of operations or
cash flows.
5. GOODWILL
Changes in the carrying amount of goodwill for the quarter ended
March 31, 2004, by operating segment, were as follows:
Environmental Fire Safety
Products Rescue Products Tool Total
------------- ------------- ------------- ------------- -------------
Goodwill balance
January 1, 2004 $ 139,937,000 $ 41,205,000 $ 102,421,000 $ 82,851,000 $ 366,414,000
Translation (168,000) (909,000) 302,000 (102,000) (877,000)
------------- ------------- ------------- ------------- -------------
Goodwill balance
March 31, 2004 $ 139,769,000 $ 40,296,000 $ 102,723,000 $ 82,749,000 $ 365,537,000
============= ============= ============= ============= =============
10
6. OTHER INTANGIBLE ASSETS
The components of the Registrant's other intangible assets as of
March 31, 2004 were as follows:
Weighted- Gross Net
average carrying Accumulated carrying
useful life value amortization value
------------ ------------ ------------ ------------
(Years)
Amortizable:
Developed software 6 $ 12,190,000 $ (4,006,000) $ 8,184,000
Customer relationships 20 1,850,000 (138,000) 1,712,000
Distribution network 40 1,300,000 (49,000) 1,251,000
Non-amortizable tradenames 2,510,000 2,510,000
------------ ------------ ------------
Total $ 17,850,000 $ (4,193,000) $ 13,657,000
============ ============ ============
Amortization expense for the three months ended March 31, 2004
totaled $302,000. The estimated aggregate amortization expense for
the next five years is as follows: $908,000 in 2004 (remaining nine
months), $1,634,000 in 2005, $1,492,000 in 2006, $1,185,000 in 2007,
$1,158,000 in 2008, $1,089,000 in 2009 and $3,681,000 thereafter.
Other intangible assets are included in the condensed consolidated
balance sheets within "Other deferred charges and assets."
7. DERIVATIVE FINANCIAL INSTRUMENTS
To manage interest costs, the Registrant utilizes interest rate
swaps in combination with its funded debt. Interest rate swaps
executed in conjunction with long-term private placements maturing
between 2004 and 2012 effectively converted fixed rate debt to
variable rate debt (fair value hedges). The Registrant is also party
to agreements with financial institutions to swap interest rates in
which the Registrant pays interest at a fixed rate on debt maturing
between 2004 and 2010 and receives interest at variable LIBOR rates
(cash flow hedges).
The Registrant designates foreign currency forward exchange
contracts as fair value hedges to protect against the variability in
exchange rates on short-term intercompany borrowings and firm
commitments denominated in foreign currencies maturing in 2004. The
Registrant also manages the volatility of cash flows caused by
fluctuations in currency rates by entering into foreign exchange
forward and option contracts. These derivative instruments hedge
portions of the Registrant's anticipated third party purchases and
forecast intercompany sales denominated in foreign currencies
maturing between 2004 and 2006.
The following table summarizes the Registrant's derivative
instruments as of March 31, 2004:
Notional Fair
amount value
------------- -------------
Interest rate contracts:
Fair value swaps $ 230,000,000 $ (1,152,000)
Cash flow swaps 95,000,000 (2,376,000)
------------- -------------
Total interest rate contracts $ 325,000,000 $ (3,528,000)
============= =============
Foreign currency contracts:
Fair value forwards $ 24,136,000 $ (250,000)
Cash flow forwards 41,795,000 1,246,000
Options 11,160,000 39,000
------------- -------------
Total foreign currency contracts $ 77,091,000 $ 1,035,000
============= =============
The Registrant expects $601,000 of pre-tax net gains that are
reported in accumulated other comprehensive income as of March 31,
2004 to be reclassified into earnings during the next 12 months.
The Registrant terminated various interest rate swaps associated
with its debt portfolio in response to movements in the interest
rate market. These transactions resulted in cash payments of
$506,000 during the three months ended March 31, 2004 and cash
receipts of $2,863,000 during the three months ended March 31, 2003.
The cash impact is included in the condensed consolidated statements
of cash flows within "Working capital changes and other."
11
8. RESTRUCTURING AND OTHER CHARGES
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
pre-tax restructuring and other charges of $1,636,000 for the three
month period ended March 31, 2003. These charges are primarily
aggregated within selling, general and administrative expenses.
9. LEGAL PROCEEDINGS
The Registrant is subject to various claims, other pending and
possible legal actions for product liability and other damages and
other matters 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.
However, in the event of unexpected future developments, it is
possible that the ultimate resolution of such matters, if
unfavorable, could have a material adverse effect on the
Registrant's 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 were 33 cases filed during the period 1999-2004, involving a
total of 2,396 plaintiffs pending in the Circuit Court of Cook
County, Illinois. Also during 2003, an additional lawsuit was filed
in Williamson County, Illinois against the Registrant and 15 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-defendant's 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 discovery phase of the litigation
began in 2004; the Registrant intends to aggressively defend these
matters. The Registrant successfully defended approximately 41
similar cases in Philadelphia in 1999 after a series of unanimous
jury verdicts in favor of the Registrant.
During the first quarter of 2004, a judge in Orange County,
California entered a $10,185,000 judgment against Safety Storage,
Inc. ("SSI") on grounds that SSI defrauded a third party creditor.
The Registrant holds a 30% minority interest investment in SSI. As
the judgment may force SSI into filing for bankruptcy reorganization
under Chapter 11, SSI is currently in settlement negotiations with
the third party creditor. The Registrant's potential loss exposure
is estimated to range from $300,000 to its investment. The
Registrant reduced its investment in SSI through a $300,000 charge
to earnings in the first quarter of 2004 to $2,900,000 as of March
31, 2004.
10. NET INCOME PER SHARE
The following table summarizes the information used in computing
basic and diluted income per share:
Three months ended
March 31,
----------------------------
2004 2003
------------ ------------
Numerator for both basic and diluted
income per share computations:
Net income $ 2,199,000 $ 6,467,000
============ ============
Denominator for basic income per share -
weighted average shares outstanding 48,026,000 47,859,000
Effect of employee stock options
(dilutive potential common shares) 91,000 5,000
------------ ------------
Denominator for diluted income per share
- adjusted shares 48,117,000 47,864,000
============ ============
12
11. SEGMENT INFORMATION
The following table summarizes the Registrant's operations by
segment for the three-month periods ended March 31, 2004 and 2003:
Three months ended March 31,
-------------------------------
2004 2003
------------- -------------
Net sales
Environmental Products $ 91,101,000 $ 84,712,000
Fire Rescue 71,553,000 98,662,000
Safety Products 69,255,000 67,188,000
Tool 44,609,000 41,389,000
------------- -------------
Total net sales $ 276,518,000 $ 291,951,000
============= =============
Operating income (loss)
Environmental Products $ 2,609,000 $ 1,605,000
Fire Rescue (2,841,000) 2,123,000
Safety Products 7,718,000 6,530,000
Tool 5,734,000 4,472,000
Corporate expense (4,352,000) (3,515,000)
------------- -------------
Total operating income 8,868,000 11,215,000
Interest expense (4,865,000) (4,895,000)
Minority interest (57,000) 173,000
Other income (expense) (970,000) 130,000
------------- -------------
Income before income taxes $ 2,976,000 $ 6,623,000
============= =============
There have been no material changes in total assets from the amount
disclosed in the Registrant's last annual report.
12. COMMITMENTS AND GUARANTEES
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.
Changes in the Registrant's warranty liabilities for the three-month
periods ended March 31, 2004 and 2003 were as follows:
Three months ended
March 31,
-----------------------------
2004 2003
------------ ------------
Balance at January 1 $ 12,861,000 $ 13,714,000
Provisions to expense 3,477,000 2,884,000
Actual costs incurred (4,362,000) (4,067,000)
------------ ------------
Balance at March 31 $ 11,976,000 $ 12,531,000
============ ============
The Registrant guarantees the debt of a third-party dealer that
sells the Registrant's vehicles. The notional amounts of the
guaranteed debt as of March 31, 2004 totaled $735,000. No losses
have been incurred as of March 31, 2004. The guarantees expire
between 2004 and 2006.
13
The Registrant also provides residual value guarantees on vehicles
sold to certain customers. Proceeds received in excess of the fair
value of the guarantee are deferred and amortized into income
ratably over the life of the guarantee. The Registrant recorded
these transactions as operating leases and recognized liabilities
equal to the fair value of the guarantees. The notional amounts of
the residual value guarantees totaled $3,480,000 as of March 31,
2004. No losses have been incurred as of March 31, 2004. The
guarantees expire between 2004 and 2010.
13. NEW ACCOUNTING PRONOUNCEMENTS
In December 2003, the FASB issued SFAS No. 132 (revised 2003),
"Employers Disclosures about Pensions and Other Postretirement
Benefits" to improve financial statement disclosures for defined
benefit plans. SFAS 132 requires more detailed disclosures about
plan assets, benefit obligations, cash flows, benefit costs and
other relevant information. The disclosures are generally effective
for fiscal years ending after December 31, 2003; a six month delay
in the effective date was provided for non-U.S. plans. The
Registrant adopted the additional disclosure provisions of SFAS 132
for its U.S. plans as of December 31, 2003.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Federal Signal Corporation manufactures a broad range of municipal and
industrial cleaning vehicles and equipment; fire rescue vehicles; safety,
signaling and communication equipment and tooling products. Due to technology,
marketing, distribution and product application synergies, the Registrant's
business units are organized and managed in four operating segments:
Environmental Products, Fire Rescue, Safety Products and Tool. The Registrant
also provides customer and dealer financing to support the sale of vehicles.
Consolidated Results of Operations
The following table presents the Registrant's results of operations for the
three months ended March 31, 2004 and 2003, respectively (in millions):
Three months ended March 31,
----------------------------
2004 2003
------------ ------------
Net sales $ 276.5 $ 291.9
Cost of sales 209.0 217.6
------------ ------------
Gross profit 67.5 74.3
Operating expenses 58.6 63.1
------------ ------------
Operating income 8.9 11.2
Interest expense and other 5.9 4.5
Income taxes 0.8 0.2
------------ ------------
Net income $ 2.2 $ 6.5
============ ============
The 5% reduction in sales to $276.5 million in 2004 was largely associated with
lower North American sales of fire rescue equipment, mainly caused by lower
truck completions in US plants during the quarter. Partly offsetting were
increased sales in the other three groups. The reduction in operating income was
attributable to lower operating earnings for Fire Rescue and a planned Corporate
expense increase to $4.3 million from $3.5 million in 2003, due in part to
higher legal costs associated with hearing loss claims and the Registrant's
decision to aggressively defend against those loss claims, partly offset by
stronger earnings for Environmental Products, Safety Products and Tool.
Interest expense was flat with 2003 on essentially flat debt balances. Other
expense of $1.0 million mainly reflects the settlement of three different dealer
and distributor relationships or disagreements. The effective tax rate returned
to a more normalized rate of 26.1%; the 2003 rate was sharply lower due to the
one-time $1,863,000 tax benefit of a deduction associated with the closure of a
production facility in the UK.
Orders and Backlog
First quarter orders increased 7.7% to $305.4 million from $283.6 million for
the comparable period of 2003. US industrial and commercial orders rose 9.4% to
$100.0 million, driven by increased demand for industrial safety products,
tooling, street sweepers and industrial vacuum trucks. First quarter orders in
international markets reached a record $103.9 million, up 32.0% from the prior
year. The increase reflected strong export demand for fire rescue trucks,
industrial vacuum trucks and street sweepers, and for aerial devices produced in
Finland. Also contributing to the increase was the effect of the weaker dollar,
which accounted for approximately one-third of the 32.0% rise. Partly offsetting
the industrial and international increases was a 10.2% decline in US municipal
market orders, due principally to weaker fire rescue orders.
Quarter-end backlog rose to $392.5 million, up $30.7 million from year-end 2003.
All groups experienced increased backlog, particularly Environmental Products,
due to strong street sweeper and refuse truck body orders, and Fire Rescue, due
to strong orders for products manufactured in our Finland-based aerial
operation.
15
Environmental Products
The following table summarizes the Environmental Products Group's operating
results for the three months ended March 31, 2004 and 2003, respectively (in
millions):
Three months ended March 31,
----------------------------
2004 2003
------------ -----------
Net sales $ 91.1 $ 84.7
Operating income 2.6 1.6
Operating margin 2.9% 1.9%
Environmental Products sales rose 7.5% to $91.1 million from $84.7 million in
2003 and operating margin improved slightly to 2.9% from 1.9% in the prior year.
Sales increased significantly for street sweepers, sewer cleaners, industrial
vacuum trucks and water blasters, consistent with stronger US industrial and
international markets. Refuse truck body sales declined from the prior year
despite higher orders due to the timing of receipt of new business. The group's
operating earnings improved 62.6% from a weak prior year quarter on higher
volumes and an improved sales mix. Partly offsetting were the adverse impact on
production costs of the stronger Canadian dollar and higher steel prices, some
of which will not be recouped from the market this year.
Fire Rescue
The following table summarizes the Fire Rescue Group's operating results for the
three months ended March 31, 2004 and 2003, respectively (in millions):
Three months ended March 31,
----------------------------
2004 2003
------------ ------------
Net sales $ 71.5 $ 98.6
Operating income (loss) (2.8) 2.1
Operating margin (4.0)% 2.2%
Fire Rescue sales decreased 27.5% to $71.5 million. Operating margin was -4.0%
versus 2.2% in 2003. Sales and earnings declined significantly due to lower
truck completions in US plants. The year-over-year reduction in production was
planned in part due to weak third quarter 2003 orders. This resulted in the
reduced availability of trucks configured for production in the Ocala, Florida
operations early in the first quarter of 2004. As planned, the Ocala operations
completed the closure of a satellite production facility and moved this
production into an existing plant, where lean enterprise initiatives had freed
up production space. This consolidation will reduce fixed costs by about $.7
million per year. Production in the quarter was disrupted due to a bottleneck in
a feeder plant caused in part by supply disruptions. Although operations
improved later in the quarter, completed and sold trucks were lower than planned
and overhead absorption was unfavorable.
16
Safety Products
The following table summarizes the Safety Products Group's operating results for
the three months ended March 31, 2004 and 2003, respectively (in millions):
Three months ended March 31,
----------------------------
2004 2003
----------- ------------
Net sales $ 69.3 $ 67.2
Operating income 7.7 6.5
Operating margin 11.1% 9.7%
Safety Products sales increased 3.1% to $69.3 million. Operating margin rose to
11.1% from 9.7% in 2003. The increase in revenue reflects strength in US
industrial markets, which generally comprise about 45% of this group's sales.
Sales of hazardous liquid containment and industrial signaling and lighting
products were particularly strong. Partly offsetting were lower sales of airport
parking equipment and US police products. Operating margins improved on the
higher sales volume as well as the absence of costs incurred last year
associated with the shutdown of a production facility in the UK; these
improvements were partly offset by higher pension expenses.
Tool
The following table summarizes the Tool Group's operating results for the three
months ended March 31, 2004 and 2003, respectively (in millions):
Three months ended March 31,
----------------------------
2004 2003
----------- ------------
Net sales $ 44.6 $ 41.4
Operating income 5.7 4.5
Operating margin 12.9% 10.8%
Tool sales rose 7.8% to $44.6 million. Operating margin rose to 12.9% from
10.8%. All product lines increased sales compared to prior year and last
quarter, consistent with a 5% increase in daily orders from US industrial
customers. Increased international orders mainly reflected the benefit of the
stronger Euro. Activity in Germany and France declined in the quarter, but was
offset by increases in Japan and Canada. Operating margins improved, as planned,
due to the increase in sales and lower fixed costs, which benefited from the
shutdown of a US plant during 2003.
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, Liquidity and Capital Resources
The Registrant utilizes its operating cash flow and available borrowings under
its revolving credit facility for working capital needs of its operations,
capital expenditures, strategic acquisitions of companies operating in markets
related to those already served, debt repayments, share repurchases and
dividends. The Registrant anticipates that its financial resources and major
sources of liquidity, including cash flow from operations and borrowing
capacity, will continue to be adequate to meet its operating and capital needs
in addition to its financial commitments.
17
The following table summarizes the Registrant's cash flows for the three months
ended March 31, 2004 and 2003, respectively (in millions):
Three months ended March 31,
----------------------------
2004 2003
------------ ------------
Operating cash flow $ 2.0 $ 17.9
Capital expenditures (4.3) (4.5)
Financial services activities, net 5.4 (0.9)
Borrowing activity, net (7.0) (4.2)
Dividends (4.8) (9.5)
Other 0.6 0.9
------------ ------------
Decrease in cash and cash equivalents $ (8.1) $ (0.3)
============ ============
Operating cash flow totaled $2.0 million for the quarter, significantly below
the prior year because of poor operations with the fire rescue and refuse truck
businesses and a build-up of inventories, particularly at the Ocala operations
due to production bottlenecks; inventories should decline in the second quarter.
Also contributing to the reduction in operating cash flow was $3.6 million in
discretionary pension contributions in 2004 and cash payments on the settlement
and termination of certain derivative instruments in 2004 versus cash proceeds
on terminations in the prior year. Cash proceeds received in 2003 from the
favorable termination of six interest rate swaps accounts for the significant
increase in cash paid for interest from $.4 million in 2003 to $2.3 million in
2004.
Financial services activities generated $5.4 million in cash flow in the first
quarter of 2004 as numerous customers paid off their loans early.
At March 31, 2004, the Registrant's manufacturing debt was $268.3 million, up
slightly from December 31, 2003 despite $7.0 million in debt repayments in the
first quarter of 2004. These payments were largely offset by a $5.9 million
non-cash decline in the fair value of designated interest rate swaps due to the
rising interest rate environment. Likewise, the debt-to-capitalization ratio
increased slightly to 41% from 40% as of December 31, 2003. The Registrant's
debt facilities contain covenants relating to a maximum debt-to-capitalization
ratio, minimum interest coverage and minimum net worth. As of March 31, 2004,
the Registrant was in compliance with the financial covenants of its debt
agreements.
As of March 31, 2004, the Registrant had $182.0 million of availability under
its $250.0 million unsecured revolving credit facility maturing in 2006.
Borrowings under this facility bear interest at a variable rate of LIBOR plus a
spread of .83%. The spread is subject to adjustment based on the level of
outstanding borrowings.
In October 2003, the Registrant announced a 50% reduction in the quarterly
dividend from $.20 per share to $.10 per share in order to improve its long-term
financial position in view of the further weakening of the U.S. state and
municipal markets and the lack of a conclusive rebound in the industrial
economy. This decision resulted in the $4.7 million decrease in dividends paid
in 2004's first quarter.
The Registrant focuses substantial effort on improving the utilization of its
working capital. The Registrant's primary working capital as a percent of net
sales was 25.4% and 23.3% as of March 31, 2004 and December 31, 2003,
respectively. The increase in the ratio is primarily due to the build-up of
inventories within the US Fire Rescue production facilities from the
aforementioned operational issues.
18
Contractual Obligations and Commercial Commitments
The following table presents a summary of the Registrant's contractual
obligations (in millions):
March 31, December 31,
2004 2003
---------- ------------
Long-term debt obligations $ 380.7 $ 380.6
Operating lease obligations 25.7 27.6
Fair value of interest rate swaps (3.5) (9.4)
Fair value of foreign currency contracts (1.0) (2.5)
---------- ------------
$ 401.9 $ 396.3
========== ============
The $5.9 million reduction in the fair value of the Registrant's interest rate
swaps occurred as a result of contract settlements, contract terminations and
market expectations that interest rates will increase in the future thereby
shifting the implied yield curve higher. The strengthening of the US dollar
against the Euro and Canadian dollar contributed to the $1.5 million decline in
the fair value of the foreign currency contracts.
Refer to Footnote 12 of the financial statements included in Part I of this Form
10-Q for a discussion of the Registrant's commercial commitments (guarantees).
Critical Accounting Policies and Estimates
As of March 31, 2004, there were no material changes to the Registrant's
critical accounting policies and estimates disclosed in its Form 10-K for the
year ended December 31, 2003.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Registrant is subject to market risk associated with changes in interest
rates and foreign exchange rates. To mitigate this risk, the Registrant utilizes
interest rate swaps and foreign currency forward and option contracts. The
Registrant does not hold or issue derivative financial instruments for trading
or speculative purposes and is not party to leverage derivatives.
The Registrant manages its exposure to interest rate movements by maintaining a
proportionate relationship between fixed-rate debt to total debt within
established percentages. The Registrant uses funded fixed-rate borrowings as
well as interest rate swap agreements to balance its overall fixed-to-floating
interest rate mix.
Of the Registrant's debt at March 31, 2004, 42% was used to support financial
services assets. The Registrant is currently comfortable with a sizeable portion
of floating rate debt to support these financial services assets, since a rise
in borrowing rates would normally correspond with an increase in lending rates
within a reasonable period.
The Registrant also has foreign currency exposures related to buying and selling
in currencies other than the local currency in which it operates. The Registrant
utilizes foreign currency forward and option contracts to manage risks
associated with sales and purchase commitments as well as forecast transactions
denominated in foreign currencies.
The information contained under the caption "Contractual Obligations and
Commercial Commitments" included in Item 2 of this Form 10-Q discusses the
changes in the Registrant's exposure to market risk during the first quarter of
2004. For additional information, refer to the discussion contained under the
caption "Market Risk Management" included in Item 7 of the Registrant's Form
10-K for the year ended December 31, 2003.
ITEM 4. CONTROLS AND PROCEDURES
As required by Rule 13a-15 under the Securities Exchange Act of 1934, the
Registrant's management, with the participation of the Registrant's Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness of
the design and operation of the Registrant's disclosure controls and procedures
as of March 31, 2004. Based on that evaluation, the Registrant's Chief Executive
Officer and Chief Financial Officer concluded that the Registrant's disclosure
controls and procedures were effective as of March 31, 2004. As a matter of
practice, the Registrant's management 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. During the quarter ended March 31, 2004, there
were no changes in the Registrant's internal controls over financial reporting
that has materially affected, or is reasonably likely to materially affect, the
Registrant's internal control over financial reporting.
19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Footnote 9 of the financial statements included in Part I of this Form 10-Q is
incorporated herein by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 10 General Release and Separation Agreement, dated February
29, 2004, by and between the Registrant and Kim A. Wehrenberg
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 March 31, 2004:
A Form 8-K was filed on January 30, 2004, under Items 7 and 12, reporting the
Registrant's press release dated January 29, 2004 that disclosed its financial
results for the fourth quarter and full year ended December 31, 2003.
A Form 8-K was filed on February 18, 2004, under Items 7 and 12, reporting an
amendment to the Registrant's Code of Ethics for CEO and Senior Financial
Officers.
20
SIGNATURE
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
5/5/04 By: /s/ Stephanie K. Kushner
- ------ ------------------------------------------
Date Stephanie K. Kushner
Vice President and Chief Financial Officer
21
EXHIBIT INDEX
Exhibit No. Description
10 General Release and Separation Agreement, dated February 29, 2004,
by and between the Registrant and Kim A. Wehrenberg, is filed
herewith.
31.1 CEO Certification under Section 302 of the Sarbanes-Oxley Act, is
filed herewith.
31.2 CFO Certification under Section 302 of the Sarbanes-Oxley Act, is
filed herewith.
32.1 CEO Certification of Periodic Report under Section 906 of the
Sarbanes-Oxley Act, is filed herewith.
32.2 CFO Certification of Periodic Report under Section 906 of the
Sarbanes-Oxley Act, is filed herewith.
22