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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 July 3, 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-2 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 48,130,635 shares outstanding at July 31, 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 and Six Months Ended
June 30, 2004 and 2003...................................................................... 4
Condensed Consolidated Statements of Comprehensive Income (Loss) for the
Three and Six Months Ended June 30, 2004 and 2003........................................... 5
Condensed Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003.............. 6
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2004 and 2003...................................................................... 7
Notes to Condensed Consolidated Financial Statements......................................... 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........ 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................... 23
Item 4. Controls and Procedures...................................................................... 23
Part II. Other Information
Item 1. Legal Proceedings............................................................................ 23
Item 4. Submission of Matters to a Vote of Security Holders.......................................... 23
Item 6. Exhibits and Reports on Form 8-K............................................................. 24
Signature....................................................................................................... 25
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.
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 "June 30, 2004" to refer to its financial position
as of July 3, 2004 and results of operations for the 13-week and 26-week periods
ended July 3, 2004.
3
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three months ended June 30, Six months ended June 30,
---------------------------- ----------------------------
2004 2003 2004 2003
------------- ------------- ------------- -------------
Net sales $ 304,141,000 $ 311,041,000 $ 580,659,000 $ 602,992,000
Costs and expenses:
Cost of sales (232,586,000) (227,111,000) (441,646,000) (444,107,000)
Selling, general and
administrative (58,459,000) (62,414,000) (117,049,000) (124,858,000)
Restructuring charges (8,062,000) (2,406,000) (8,062,000) (3,702,000)
------------- ------------- ------------- -------------
Operating income 5,034,000 19,110,000 13,902,000 30,325,000
Interest expense (5,162,000) (5,140,000) (10,027,000) (10,035,000)
Other income (expense), net (3,032,000) 62,000 (4,002,000) 192,000
Minority interest 19,000 36,000 (38,000) 209,000
------------- ------------- ------------- -------------
Income (loss) from continuing
operations before income taxes (3,141,000) 14,068,000 (165,000) 20,691,000
Income tax benefit (expense) 871,000 (4,121,000) 94,000 (4,277,000)
------------- ------------- ------------- -------------
Income (loss) from continuing
operations (2,270,000) 9,947,000 (71,000) 16,414,000
Loss on disposal of
discontinued operations,
net of tax benefit of $772,000 and
$222,000, respectively (4,357,000) (369,000) (4,357,000) (369,000)
------------- ------------- ------------- -------------
Net income (loss) $ (6,627,000) $ 9,578,000 $ (4,428,000) $ 16,045,000
============= ============= ============= =============
COMMON STOCK DATA:
Basic and diluted net income per share:
Income (loss) from continuing
operations $ (.05) $ .21 $ -- $ .34
Loss on disposal of
discontinued operations (.09) (.01) (.09) (.01)
------------- ------------- ------------- -------------
Net income (loss)* $ (.14) $ .20 $ (.09) $ .33
============= ============= ============= =============
Weighted average common
shares outstanding
Basic 48,113,000 47,977,000 48,070,000 47,918,000
Diluted 48,197,000 48,016,000 48,157,000 47,940,000
Cash dividends per share
of common stock $ .10 $ .20 $ .20 $ .40
* amounts above may not add due to rounding
See notes to condensed consolidated financial statements.
4
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
Three months ended June 30, Six months ended June 30,
---------------------------- ----------------------------
2004 2003 2004 2003
------------- ------------- ------------- -------------
Net income (loss) $ (6,627,000) $ 9,578,000 $ (4,428,000) $ 16,045,000
Other comprehensive income (loss), net
of tax -
Foreign currency
translation adjustments 27,000 3,491,000 (2,089,000) 6,530,000
Net derivative gain, cash flow hedges 1,441,000 843,000 580,000 2,286,000
------------- ------------- ------------- -------------
Comprehensive income (loss) $ (5,159,000) $ 13,912,000 $ (5,937,000) $ 24,861,000
============= ============= ============= =============
See notes to condensed consolidated financial statements.
5
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2004 2003 (a)
-------------- ---------------
(Unaudited)
ASSETS
Manufacturing activities -
Current assets:
Cash and cash equivalents $ 6,614,000 $ 10,113,000
Trade accounts receivable, net of allowances
for doubtful accounts 202,223,000 190,873,000
Inventories 203,848,000 176,687,000
Prepaid expenses 21,682,000 16,294,000
Net assets of discontinued operations 2,880,000 8,335,000
-------------- ---------------
Total current assets 437,247,000 402,302,000
Properties and equipment, net 115,867,000 123,415,000
Goodwill 362,046,000 363,030,000
Other deferred charges and assets 55,813,000 60,759,000
-------------- ---------------
Total manufacturing assets 970,973,000 949,506,000
Financial services activities - Lease financing receivables, net of
allowances for doubtful accounts 215,373,000 230,111,000
-------------- ---------------
Total assets $1,186,346,000 $ 1,179,617,000
============== ===============
LIABILITIES
Manufacturing activities -
Current liabilities:
Short-term borrowings $ 114,959,000 $ 68,634,000
Trade accounts payable 80,138,000 78,320,000
Customer deposits 29,093,000 21,171,000
Accrued liabilities and income taxes 100,003,000 109,219,000
-------------- ---------------
Total current liabilities 324,193,000 277,344,000
Long-term borrowings 177,288,000 194,130,000
Long-term pension and other liabilities 47,995,000 38,692,000
Deferred income taxes 40,232,000 45,595,000
-------------- ---------------
Total manufacturing liabilities 589,708,000 555,761,000
-------------- ---------------
Financial services activities - Borrowings 188,451,000 201,347,000
SHAREHOLDERS' EQUITY
Common stock - par value 48,565,000 48,439,000
Capital in excess of par value 94,091,000 91,898,000
Retained earnings 303,312,000 317,404,000
Treasury stock (14,563,000) (14,850,000)
Deferred stock awards (3,636,000) (2,309,000)
Accumulated other comprehensive income (loss) (19,582,000) (18,073,000)
-------------- ---------------
Total shareholders' equity 408,187,000 422,509,000
-------------- ---------------
Total liabilities and shareholders' equity $1,186,346,000 $ 1,179,617,000
============== ===============
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 STATEMENTS OF CASH FLOWS (Unaudited)
Six months ended June 30,
-------------------------------
2004 2003
-------------- ---------------
Operating activities:
Net income (loss) $ (4,428,000) $ 16,045,000
Loss on disposal of discontinued operations 4,357,000 369,000
Depreciation and amortization 12,016,000 12,952,000
Non-cash restructuring charges 7,495,000 1,881,000
Loss on minority interest divesture 2,932,000
Pension contributions (4,058,000)
Working capital changes and other (26,451,000) 16,001,000
-------------- ---------------
Net cash provided by (used for) operating activities (8,137,000) 47,248,000
Investing activities:
Purchases of properties and equipment (11,019,000) (8,777,000)
Principal extensions under lease financing agreements (67,994,000) (80,015,000)
Principal collections under lease financing agreements 82,252,000 79,214,000
Proceeds from sale of discontinued operations 7,453,000
Other, net 1,665,000 (1,637,000)
-------------- ---------------
Net cash provided by (used for) investing activities 4,904,000 (3,762,000)
Financing activities:
Increase (decrease) in short-term borrowings, net 19,236,000 (70,981,000)
Proceeds from issuance of long-term borrowings 45,141,000
Repayment of long-term borrowings (10,162,000)
Purchases of treasury stock 37,000 (117,000)
Cash dividends paid to shareholders (9,664,000) (19,142,000)
Other, net 287,000 1,286,000
-------------- ---------------
Net cash used for financing activities (266,000) (43,813,000)
Decrease in cash and cash equivalents (3,499,000) (327,000)
Cash and cash equivalents at beginning of period 10,113,000 9,782,000
-------------- ---------------
Cash and cash equivalents at end of period $ 6,614,000 $ 9,455,000
============== ===============
Supplemental disclosures:
Cash paid for interest $ 10,217,000 $ 10,668,000
Cash paid for income taxes 1,864,000 2,701,000
See notes to condensed consolidated financial statements.
7
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 and six month periods ended June 30, 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 "June 30, 2004" to
refer to its financial position as of July 3, 2004 and results of
operations for the 13-week and 26-week periods ended July 3, 2004.
2. STOCK-BASED COMPENSATION PLANS
The following table illustrates the effect on net income (loss) and,
earnings (loss) per share for the three- and six-month periods ended June
30, 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 June 30, Six months ended June 30,
------------------------------- ---------------------------
2004 2003 2004 2003
-------------- --------------- ------------- ------------
Reported net income (loss) $ (6,627,000) $ 9,578,000 $ (4,428,000) $ 16,045,000
Add: Stock-based employee compensation expense
included in reported net income, net of related tax effects 173,000 200,000 318,000 481,000
Deduct: Total stock-based employee compensation
expense determined under the fair-value method for all
awards, net of related tax effects (507,000) (398,000) (1,409,000) (874,000)
-------------- --------------- ------------- ------------
Pro forma net income (loss) $ (6,961,000) $ 9,380,000 $ (5,519,000) $ 15,652,000
============== =============== ============= ============
Basic and diluted net income (loss) per common share:
Reported net income (loss) $ (.14) $ .20 $ (.09) $ .33
Pro forma net income (loss) $ (.14) $ .20 $ (.11) $ .33
The stock-based employee compensation expense determined under the
fair-value method for the six months ended June 30, 2004 was affected by
the retirement and separation agreements relating to two executive
officers.
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.
8
3. 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 June 30, Six months ended June 30,
--------------------------- -------------------------
2004 2003 2004 2003
------------ ------------- ----------- ------------
Service cost $ 1,175,000 $ 1,023,000 $ 2,350,000 $ 2,045,000
Interest cost 1,929,000 1,776,000 3,858,000 3,552,000
Expected return on plan assets (1,990,000) (1,960,000) (3,980,000) (3,921,000)
Amortization of transition amount (58,000) (57,000) (116,000) (115,000)
Other 410,000 229,000 820,000 458,000
------------ ------------- ----------- -----------
Net periodic pension expense $ 1,466,000 $ 1,011,000 $ 2,932,000 $ 2,019,000
========--== ============= =========== ============
The Registrant contributed $3,405,000 to its U.S. benefit plans and
$653,000 to its non-U.S. benefit plans during the six months ended June
30, 2004. The Registrant 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.
4. INVENTORIES
Inventories are summarized as follows:
June 30, December 31,
2004 2003
------------ -------------
Raw materials $ 70,674,000 $ 64,329,000
Work in progress 83,587,000 61,798,000
Finished goods 49,587,000 50,560,000
------------ -------------
Total inventories $203,848,000 $ 176,687,000
============ =============
5. PROPERTIES AND EQUIPMENT
Properties and equipment are summarized as follows:
June 30, December 31,
2004 2003
------------- -------------
Land $ 5,777,000 $ 5,809,000
Buildings and improvements 62,878,000 62,316,000
Machinery and equipment 243,462,000 241,883,000
Accumulated depreciation (196,250,000) (186,593,000)
------------- -------------
Total properties and equipment $ 115,867,000 $ 123,415,000
============= =============
9
6. DEBT
Short-term borrowings are summarized as follows:
June 30, December 31,
2004 2003
------------ ------------
Revolving credit facility $100,000,000 $ 75,000,000
Notes payable 8,128,000 4,830,000
Current maturities of long-term debt 32,144,000 25,151,000
------------ ------------
Total short-term borrowings $140,272,000 $104,981,000
============ ============
Of the above amounts, $25,313,000 and $36,347,000 were classified as
financial services activities borrowings at June 30, 2004 and December 31,
2003, respectively.
In April 2003, Standard and Poor's downgraded the Registrant's debt rating
from A-2 to A-3. As the short-term commercial paper market was no longer
available, the Registrant entered into a $250,000,000 unsecured revolving
credit facility maturing in 2006 with a syndicate of banks in June 2003.
The facility replaced an existing $300,000,000 commercial paper backup
credit facility. At December 31, 2003, $75,000,000 was outstanding under
this agreement bearing interest at a variable rate of LIBOR plus .83%. The
facility includes covenants relating to a maximum debt-to-capitalization
ratio, minimum net worth and minimum interest coverage ratio.
In June 2004, the Registrant renegotiated its revolving credit facility
covenants to exclude restructuring and other one-time charges and to
reduce the minimum interest coverage ratio from 3.0 to 2.5. The Registrant
was in compliance with all of these covenants as of June 30, 2004. At the
same time, the Registrant reduced the size of the facility to
$200,000,000. As of June 30, 2004, $100,000,000 was outstanding under this
facility bearing interest at a variable rate of LIBOR plus .93%.
Weighted average interest rates on short-term borrowings were 2.23% and
2.17% at June 30, 2004 and December 31, 2003, respectively.
Long-term borrowings are summarized as follows:
June 30, December 31,
2004 2003
------------- ------------
Private placement - fixed rate $ 320,000,000 $330,000,000
Private placement - floating rate 50,000,000 50,000,000
Other 3,908,000 590,000
------------- ------------
Total contractual debt obligations 373,908,000 380,590,000
Fair value of interest rate swaps (11,205,000) (7,904,000)
Unamortized balance of terminated fair value interest rate swaps 9,867,000 11,595,000
------------- -----------
Total long-term borrowings, including current portion 372,570,000 384,281,000
Less current maturities (32,144,000) (25,151,000)
------------- ------------
Total long-term borrowings $ 340,426,000 $359,130,000
============= ============
Of the above amounts, $163,138,000 and $165,000,000 were classified as
financial services activities borrowings at June 30, 2004 and December 31,
2003, respectively.
The fixed rate private placement borrowings bear interest at rates ranging
from 4.93% to 7.99% and mature between 2004 and 2012.
In June 2003, the Registrant entered into a $50,000,000 private placement
agreement to reduce reliance on short-term debt. The agreement bears
interest at a variable rate of LIBOR plus 1.04% (2.63% and 2.21% as of
June 30, 2004 and December 31, 2003, respectively) with $20,000,000
maturing in 2008, $20,000,000 in 2010 and $10,000,000 in 2013.
For each of the above long-term notes, significant covenants consist of a
maximum debt-to-capitalization ratio and minimum net worth. At June 30,
2004, all of the Registrant's retained earnings were free of any
restrictions and the Registrant was in compliance with the financial
covenants of its debt agreements.
10
7. GOODWILL
Changes in the carrying amount of goodwill for the six months ended June
30, 2004, by operating segment, were as follows:
Environmental Fire Safety
Products Rescue Products Tool Total
------------- ------------ ------------ ----------- ------------
Goodwill balance
January 1, 2004 $ 139,937,000 $ 37,821,000 $102,421,000 $82,851,000 $363,030,000
Translation (106,000) (1,113,000) 351,000 (116,000) (984,000)
------------- ------------ ------------ ----------- ------------
Goodwill balance
June 30, 2004 $ 139,831,000 $ 36,708,000 $102,772,000 $82,735,000 $362,046,000
============= ============ ============ =========== ============
8. OTHER INTANGIBLE ASSETS
The components of the Registrant's other intangible assets as of June 30,
2004 were as follows:
Weighted-average Gross carrying Accumulated Net carrying
useful life value amortization value
---------------- -------------- ------------ ------------
(Years)
Amortizable:
Developed software 6 $ 12,589,000 $ (4,198,000) $ 8,391,000
Customer relationships 20 1,850,000 (162,000) 1,688,000
Distribution network 40 1,300,000 (57,000) 1,243,000
Non-amortizable tradenames 1,000,000 1,000,000
-------------- ------------ ------------
Total $ 16,739,000 $ (4,417,000) $ 12,322,000
============== ============ ============
Amortization of intangibles for the six months ended June 30, 2004 totaled
$526,000. The estimated aggregate amortization of intangibles for the next
five years is as follows: $605,000 in 2004 (remaining six months),
$1,676,000 in 2005, $1,534,000 in 2006, $1,227,000 in 2007, $1,198,000 in
2008, $1,130,000 in 2009 and $3,952,000 thereafter.
During the three months ended June 30, 2004, the Registrant recorded a
$1,510,000 impairment charge to write-off a tradename that will no longer
be used after the consolidation of the refuse businesses in conjunction
with the restructuring plan announced in June 2004.
Other intangible assets are included in the condensed consolidated balance
sheets within "Other deferred charges and assets."
9. 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 forecasted intercompany sales denominated in
foreign currencies maturing between 2004 and 2006.
11
The following table summarizes the Registrant's derivative instruments:
June 30, 2004 December 31, 2003
----------------------------- --------------------------
Notional Fair Notional Fair
amount value amount value
------------- -------------- ------------ ------------
Interest rate contracts:
Fair value swaps $ 220,000,000 $ (11,205,000) $285,000,000 $ (7,904,000)
Cash flow swaps 95,000,000 225,000 115,000,000 (1,542,000)
------------- -------------- ------------ ------------
Total interest rate contracts $ 315,000,000 $ (10,980,000) $400,000,000 $ (9,446,000)
============= ============== =========== ============
Foreign currency contracts:
Fair value forwards $ 14,055,000 $ 224,000 $ 22,033,000 $ 337,000
Cash flow forwards 31,397,000 953,000 37,435,000 2,206,000
Options 7,564,000 (125,000)
------------- -------------- ------------ ------------
Total foreign currency contracts $ 53,016,000 $ 1,052,000 $ 59,468,000 $ 2,543,000
============= ============== ============ ============
The Registrant expects $400,000 of pre-tax net gains that are reported in
accumulated other comprehensive income as of June 30, 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 six months
ended June 30, 2004 and cash receipts of $7,174,000 during the six months
ended June 30, 2003. The cash impact is included in the condensed
consolidated statements of cash flows within "Working capital changes and
other."
10. RESTRUCTURING CHARGES
In June 2004, the Registrant announced the implementation of a
restructuring initiative focused on plant consolidations and product
rationalization in order to streamline its operations. The restructuring
plan is aimed at improving the profitability of the fire rescue, refuse
truck body and European tooling businesses as well as improving the
Registrant's overhead cost structure.
The Registrant will close its production facilities located in Preble, New
York and consolidate U.S. production of fire rescue vehicles into its
Ocala, Florida operations. The consolidation is expected to be complete by
the end of 2004. This closure resulted in $2,576,000 of restructuring
charges in the Fire Rescue Group for the three months ended June 30, 2004.
The Registrant expects the closure to result in total restructuring
charges of approximately $6,600,000.
The Registrant has tentatively decided to close its refuse truck
production facility in Oshkosh, Wisconsin, and consolidate production into
its facility in Medicine Hat, Alberta. The Registrant expects to complete
the plant closure and transfer production by early 2005. This proposed
closure resulted in $4,256,000 of restructuring charges in the
Environmental Products Group for the three months ended June 30, 2004. The
Registrant expects to incur total restructuring charges of approximately
$11,300,000.
The Registrant will cease manufacturing tooling products in France and
consolidate this production into its Portugal facility by the second
quarter of 2005. Restructuring charges amounted to $895,000 for the three
months ended June 30, 2004. This consolidation is expected to result in
total restructuring charges of approximately $1,400,000 in the Tool Group.
The Registrant's corporate operations incurred an additional $335,000
during the three months ended June 30, 2004. These incremental costs
related to outside services that were directly attributable to the
restructuring activities.
The following table represents a rollforward of the restructuring reserves
during the three months ended June 30, 2004:
Asset
Severance impairment Other Total
--------- ----------- ------------ ----------
Charges to expense $ 138,000 $ 7,495,000 $ 429,000 $ 8,062,000
Cash payments (138,000) (335,000) (473,000)
Non-cash activity (7,495,000) (7,495,000)
--------- ----------- ------------ -----------
Balance as of June 30, 2004 $ - $ - $ 94,000 $ 94,000
========= =========== ============ ===========
12
The severance charges consist of termination and benefit costs for direct
manufacturing employees involuntarily terminated prior to June 30, 2004.
The costs of retention bonuses for employees not severed as of June 30,
2004 will be recognized ratably over the future service period. The asset
impairment charges include $5,985,000 of net realizable value adjustments
on real property and manufacturing equipment and the write-off of an
intangible asset valued at $1,510,000 relating to a tradename that will no
longer be used after the consolidation of the refuse businesses.
In early 2003, the Registrant approved a restructuring plan that
principally included the closure of two manufacturing facilities to
improve operating efficiencies and reduce costs. Safety Products Group
closed a facility in the United Kingdom and reduced its workforce at other
plants in 2003 at a total cost of $3,289,000, of which $2,835,000 was
incurred during the six months ended June 30, 2003. The Tool Group
incurred $719,000 of restructuring costs to shut down a production
facility in New York in 2003; $567,000 was incurred during the six months
ended June 30, 2003. The Environmental Products Group incurred $300,000 of
restructuring costs for the six months ended June 30, 2003.
The following table presents a rollforward of the restructuring reserves
during the three and six months ended June 30, 2003:
Asset
Severance impairment Other Total
----------- ------------ ---------- -----------
Charges to expense $ 556,000 $ 481,000 $ 259,000 $ 1,296,000
Cash payments (556,000) (259,000) (815,000)
Non-cash activity (481,000) (481,000)
----------- ------------ ---------- -----------
Balance as of March 31, 2003 - - - -
Charges to expense 828,000 1,400,000 178,000 2,406,000
Cash payments (748,000) (78,000) (826,000)
Non-cash activity (1,400,000) (1,400,000)
----------- ------------ ---------- -----------
Balance as of June 30, 2003 $ 80,000 $ - $ 100,000 $ 180,000
=========== ============ ========== ===========
The severance charges consist of costs to terminate employees and the
ratable recognition of retention bonuses for employees providing service
until their termination date. The asset impairment charges consist of net
realizable value adjustments to manufacturing equipment located in the
United Kingdom.
11. DISCONTINUED OPERATIONS
In conjunction with the strategic restructuring initiatives announced in
June 2004, the Registrant determined that its 54% majority ownership
interest in Plastisol Holdings B.V. ("Plastisol") was a non-strategic
investment and signed a definitive agreement to sell its interest to the
minority partner. The Registrant acquired the ownership interest in 2001.
Plastisol manufactures glassfiber reinforced polyester fire truck cabs and
bodies mainly for the European and Asian markets. The Registrant closed
the transaction in July 2004 for $2,450,000 in cash and a $490,000 note
receivable. The Registrant recorded a $4,357,000 loss on sale of
discontinued operations for the three and six months ended June 30, 2004,
representing the write-down of Plastisol's carrying amount to fair value.
Plastisol's revenues totaled $7,716,000 and $6,096,000 for the six months
ended June 30, 2004 and 2003, respectively. The Registrant completed the
sale of Plastisol in July 2004 and used the cash proceeds to repay debt.
In April 2003, the Registrant completed the sale of the Sign Group to a
third party for cash of $7,453,000 and a $4,250,000 note receivable
resulting in a $369,000 loss on disposal of discontinued operations for
the three and six months ended June 30, 2003. 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. Sign Group revenues for the six months ended June
30, 2003 were $12,844,000. The Registrant retained certain assets and
liabilities in conjunction with the sale. Proceeds were used to pay down
debt.
13
12. LEGAL PROCEEDINGS
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; this class certification lawsuit
has been dismissed for failure to prosecute. 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. At that time, the
Registrant held a 30% minority interest investment in SSI, a manufacturer
of buildings for the off-site storage of hazardous waste material, and
recorded a $300,000 charge to earnings for the three months ended March
31, 2004 due to the potential loss exposure. The Registrant subsequently
sold its share in SSI to the majority shareholder in June 2004 for a
nominal amount and, in connection therewith, recorded a $2,932,000 loss
for the three months ended June 30, 2004. Under the terms of the
transaction, the Registrant was released from any future liability. The
non-operating loss is included in other expense.
The Registrant is subject to various other claims, pending and possible
legal actions for product liability and other damages and 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.
13. NET INCOME PER SHARE
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,
-------------------------------- ----------------------------
2004 2003 2004 2003
--------------- -------------- -------------- ------------
Numerators for both basic and diluted
income per share computations:
Income (loss) from continuing operations $ (2,270,000) $ 9,947,000 $ (71,000) $ 16,414,000
Loss on disposal of discontinued
operations, net of tax (4,357,000) (369,000) (4,357,000) (369,000)
--------------- -------------- -------------- ------------
Net income (loss) $ (6,627,000) $ 9,578,000 $ (4,428,000) $ 16,045,000
=============== ============== ============== ==========
Denominator for basic income per share -
weighted average shares outstanding 48,113,000 47,977,000 48,070,000 47,918,000
Effect of employee stock options (dilutive
potential common shares) 84,000 39,000 87,000 22,000
--------------- -------------- -------------- ------------
Denominator for diluted income per share -
adjusted shares 48,197,000 48,016,000 48,157,000 47,940,000
=============== ============== ============== ==========
14
14. SEGMENT INFORMATION
The following table summarizes the Registrant's operations by segment for
the three-month and six-month periods ended June 30, 2004 and 2003:
Three months ended June 30, Six months ended June 30,
-------------------------------- ----------------------------
2004 2003 2004 2003
--------------- -------------- -------------- ------------
Net sales
Environmental Products $ 95,402,000 $ 88,226,000 $ 186,503,000 $172,938,000
Fire Rescue 96,763,000 112,619,000 168,316,000 211,281,000
Safety Products 69,402,000 71,054,000 138,657,000 138,242,000
Tool 42,574,000 39,142,000 87,183,000 80,531,000
--------------- -------------- -------------- ------------
Total net sales $ 304,141,000 $ 311,041,000 $ 580,659,000 $602,992,000
=============== ============== ============== ============
Operating income (loss)
Environmental Products $ (595,000) $ 5,270,000 $ 2,014,000 $ 6,875,000
Fire Rescue (2,092,000) 5,393,000 (4,933,000) 7,516,000
Safety Products 8,081,000 7,904,000 15,799,000 14,434,000
Tool 4,633,000 4,214,000 10,367,000 8,686,000
Corporate expense (4,993,000) (3,671,000) (9,345,000) (7,186,000)
--------------- -------------- -------------- ------------
Total operating income 5,034,000 19,110,000 13,902,000 30,325,000
Interest expense (5,162,000) (5,140,000) (10,027,000) (10,035,000)
Minority interest 19,000 36,000 (38,000) 209,000
Other income (expense) (3,032,000) 62,000 (4,002,000) 192,000
--------------- -------------- -------------- ------------
Income (loss) before income taxes $ (3,141,000) $ 14,068,000 $ (165,000) $ 20,691,000
=============== ============== ============== ============
There have been no material changes in total assets from the amount disclosed in
the Registrant's last annual report.
15. 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 six-month periods
ended June 30, 2004 and 2003 were as follows:
Six months ended June 30,
----------------------------------
2004 2003
--------------- ----------------
Balance at January 1 $ 12,769,000 $ 13,609,000
Provisions to expense 7,425,000 6,672,000
Actual costs incurred (8,003,000) (9,808,000)
--------------- ----------------
Balance at June 30 $ 12,191,000 $ 10,473,000
=============== ================
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
June 30, 2004 totaled $720,000. No losses have been incurred as of June
30, 2004. The guarantees expire between 2004 and 2006.
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
$3,400,000 as of June 30, 2004. No losses have been incurred as of June
30, 2004. The guarantees expire between 2004 and 2010.
15
16. SUBSEQUENT EVENT
The Registrant completed the sale of a portion of its taxable leasing
portfolio for $9,600,000 in July 2004 as part of the broad restructuring
plan announced in June 2004. The proceeds, which approximated the net book
value of the assets, were used to reduce the Registrant's debt position.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Federal Signal Corporation (the "Registrant") 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.
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 "June 30, 2004" to refer to its financial position
as of July 3, 2004 and results of operations for the 13-week and 26-week periods
ended July 3, 2004.
Consolidated Results of Operations
- ----------------------------------
The following table presents the Registrant's results of operations for the
three- and six-month periods ended June 30, 2004 and 2003, respectively (in
millions):
Three months ended June 30, Six months ended June 30,
---------------------------- ----------------------------
2004 2003 2004 2003
------------- ------------- ------------ ------------
Net sales $ 304.1 $ 311.0 $ 580.7 $ 603.0
Cost of sales 232.6 227.1 441.6 444.1
------------- ------------- ------------ ------------
Gross profit 71.5 83.9 139.1 158.9
Operating expenses 58.4 62.4 117.1 124.9
Restructuring charges 8.1 2.4 8.1 3.7
------------- ------------- ------------ ------------
Operating income 5.0 19.1 13.9 30.3
Interest expense 5.2 5.2 10.0 10.0
Other expense (income) and minority interest 3.0 (.1) 4.1 (.4)
Income tax expense (benefit) (.9) 4.1 (.1) 4.3
------------- ------------- ------------ ------------
Income (loss) from continuing operations (2.3) 9.9 (.1) 16.4
Loss on disposal of discontinued operations (4.3) (.3) (4.3) (.3)
------------- ------------- ------------ ------------
Net income (loss) $ (6.6) $ 9.6 $ (4.4) $ 16.1
============= ============= ============ ============
Net sales declined 2% to $304.1 million in the second quarter of 2004 compared
to the second quarter of 2003 and 4% to $580.7 million for the six months ended
June 30, 2004 compared to the same period in the prior year, largely associated
with lower production and shipments from North American fire rescue plants,
lower refuse truck volumes and lower parking systems sales. Partly offsetting
were increased sales in the Environmental Products and Tool groups.
Operating income declined to $5.0 million in the second quarter of 2004 from
$19.1 million in the second quarter of 2003 and to $13.9 million for the six
months ended June 30, 2004 compared to $30.3 million for the six months ended
June 30, 2003. The reduction was due to poor fire rescue operating performance
in Ocala, higher raw material costs, lower refuse production cost absorption and
planned increases in Corporate expenses coupled with restructuring charges
associated with the Registrant's North American fire rescue business, its refuse
truck body business and a European tool business.
Interest expense in the second quarter of 2004 and for the six months ended June
30, 2004 was flat compared to the same periods in the prior year. Other expense
in 2004 includes a $2.9 million loss on sale of the Registrant's minority
interest in Safety Storage, Inc. ("SSI"), a California-based manufacturer of
buildings for off-site storage of hazardous waste materials. The sale of SSI was
completed in June 2004. Other expense also includes $1.0 million in charges for
the six months ended June 30, 2004 relating to the settlement of three different
dealer and distributor relationships or disagreements.
The $4.3 million loss on disposal of discontinued operations for the second
quarter of 2004 resulted from the sale of the Registrant's 54% interest in
Plastisol Holdings B.V. ("Plastisol"), a manufacturer of glassfiber reinforced
polyester fire truck cabs located in the Netherlands. The Registrant closed the
transaction in July 2004. The $.3 million loss in the second quarter of 2003
resulted from the sale of the Sign Group. Proceeds from the sale of Plastisol
and the Sign Group were used to repay debt.
17
Orders and Backlog
- ------------------
Orders rose 10% in the second quarter of 2004 to $317.8 million from $287.6
million in the prior year period. US municipal and governmental orders rose 7%
in the second quarter of 2004 due to increased demand for sweepers, sewer
cleaners, warning systems and fire apparatus. For the six months ended June 30,
2004, municipal and governmental orders were essentially flat with the prior
year period. For the second quarter of 2004, US industrial and commercial orders
were up slightly from the prior year period, as increased orders for hazardous
area lighting and industrial tooling more than offset lower refuse truck body
orders, due in part to a smaller contract with one large industrial customer.
Orders in international markets were $107.9 million for the second quarter of
2004, 24% above the prior year period due to strong export demand, including the
impact of a $13.0 million contract to supply fire rescue equipment to Iraq.
Quarter end backlog rose to $404.0 million, up approximately $11.0 million in
the quarter and from the prior year. The increase from the first quarter of 2004
was mainly for Fire Rescue and Safety Products.
Restructuring Charges
- ---------------------
The following table summarizes the Registrant's restructuring charges by segment
for the three- and six-month periods ended June 30, 2004 and 2003, respectively
(in millions):
Three months ended June 30, Six months ended June 30,
--------------------------- --------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Environmental Products $ 4.3 $ 4.3 $ .3
Fire Rescue 2.6 2.6
Safety Products $ 2.1 2.8
Tool .9 .3 .9 .6
Corporate .3 .3
----------- ----------- ----------- -----------
Total $ 8.1 $ 2.4 $ 8.1 $ 3.7
=========== =========== =========== ===========
In June 2004, the Registrant announced the implementation of the first steps of
a broad restructuring initiative. The plan is aimed at enhancing the
Registrant's competitive profile and creating a solid foundation for annual
revenue growth in the high single digits. The measures include improving the
profitability of the refuse truck body, fire rescue and European tooling
operations, divesting non-strategic business activities and improving the
Registrant's overhead cost structure.
The Registrant has made a tentative decision to close its Leach production
facility in Oshkosh, Wisconsin, and consolidate production of rear-loading
refuse truck bodies into its facility in Medicine Hat, Alberta. The Registrant
is currently in discussions with the United Auto Workers, which represent the
Leach employees, and with provincial and local Canadian leadership regarding the
terms of the expansion of the Medicine Hat activities. Assuming successful
resolution of these negotiations, the Registrant expects to complete the plant
closure and transfer production by early 2005. Environmental Products incurred
$4.3 million in restructuring charges for the three- and six-month periods ended
June 30, 2004, consisting of a $2.8 million impairment charge to adjust the
value of certain manufacturing equipment to its net realizable value and a $1.5
million write-off of a tradename valued as an intangible asset. The Registrant
expects to incur a total of approximately $11.3 million in restructuring charges
to complete the consolidation.
The Registrant will close its 120,000 square foot production facilities in
Preble, New York and consolidate US production of fire rescue vehicles into its
Ocala, Florida operations. The consolidation is possible because successful lean
manufacturing initiatives have reduced manufacturing space requirements through
the Fire Rescue Group, and because of progress being made to rationalize and
structure the broad array of vehicle offerings. The Registrant expects the
consolidation to be completed by the end of 2004; total restructuring costs are
estimated at $6.6 million. Fire Rescue incurred $2.6 million in restructuring
charges for the three- and six-month periods ended June 30, 2004, comprised of
real property and manufacturing equipment impairment.
The Registrant will cease manufacturing tooling products in France and
consolidate production into its facility in Portugal, which began operations in
2003. The transfer is part of a broader plan to reduce fixed overhead and shift
the manufacturing footprint to lower-cost locations. The consolidation is
expected to be completed by the second quarter of 2005 at a total
18
estimated cost of $1.4 million. The Tool Group incurred $.9 million in
restructuring costs for the three- and six-month periods ended June 30, 2004,
primarily consisting of manufacturing equipment impairment and severance for
terminated employees as of June 30, 2004.
The Registrant's Corporate operations incurred $.3 million in restructuring
charges for the three and six months ended June 30, 2004, relating to outside
services directly attributable to the restructuring plan and incremental to
other costs.
In the first quarter of 2003, the Registrant approved a restructuring plan that
principally consisted of the closure of two manufacturing facilities to improve
operating efficiencies and reduce costs. The Registrant closed a facility in the
United Kingdom and reduced headcount at other Safety Products Group operating
divisions resulting in restructuring costs of $2.1 million and $2.8 million for
the three- and six-month periods ended June 30, 2003, respectively, comprised of
equipment impairments and employee termination and benefit costs. The Tool Group
incurred $.3 million and $.6 million of restructuring charges for the three- and
six-month periods ended June 30, 2003, respectively, principally consisting of
severance costs relating to the closure of a manufacturing facility in New York.
Environmental Products incurred $.3 million of restructuring charges for the six
months ended June 30, 2003.
Environmental Products
- ----------------------
The following table summarizes the Environmental Products Group's operating
results for the three- and six-month periods ended June 30, 2004 and 2003,
respectively (dollars in millions):
Three months ended June 30, Six months ended June 30,
---------------------------- ---------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net sales $ 95.4 $ 88.2 $ 186.5 $ 172.9
Operating income (loss) (.6) 5.3 2.0 6.9
Operating margin (.6)% 6.0% 1.1% 4.0%
Environmental Products sales increased 8% to $95.4 million in the second quarter
of 2004 compared to the second quarter of 2003 and 8% to $186.5 million for the
six months ended June 30, 2004 compared to the same period in the prior year.
The revenue increase reflects higher sales of sweepers and industrial vacuum
trucks, while refuse truck body sales were lower due in part to a smaller
contract with one large customer.
Operating margin declined to -.6% in the second quarter of 2004 from 6.0% in the
second quarter of 2003 and to 1.1% from 4.0% for the six-month periods ended
June 30, 2004 and 2003, respectively. The reduction in operating margin includes
restructuring charges incurred to consolidate the refuse business amounting to
$4.3 million, $4.3 million and $.3 million for the three months ended June 30,
2004 and the six months ended June 30, 2004 and 2003, respectively. The
reduction in operating margin also includes the adverse impact of higher raw
material costs incurred before a pricing action went into effect, plus higher
refuse production costs in part attributable to the stronger Canadian dollar;
partly offsetting was the beneficial impact of the higher sales volume and
reductions in overhead expenses.
Fire Rescue
- -----------
The following table summarizes the Fire Rescue Group's operating results for the
three- and six-month periods ended June 30, 2004 and 2003, respectively (dollars
in millions):
Three months ended June 30, Six months ended June 30,
---------------------------- ---------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net sales $ 96.7 $ 112.6 $ 168.3 $ 211.3
Operating income (loss) (2.1) 5.4 (4.9) 7.5
Operating margin (2.1)% 4.8% (2.9)% 3.6%
Fire Rescue sales declined 14% to $96.7 million in the second quarter of 2004
compared to the second quarter of 2003 and 20% to $168.3 million for the six
months ended June 30, 2004 compared to the same period in the prior year. The
decline in
19
sales occurred despite a 17% increase in orders, and was due largely to lower
production and shipments from the Ocala operations.
Operating margin declined to -2.1% in the second quarter of 2004 from 4.8% in
the second quarter of 2003 and to -2.9% from 3.6% for the six-month periods
ended June 30, 2004 and 2003, respectively. The operating margin included
restructuring costs incurred to consolidate US production of fire rescue
vehicles totaling $2.6 million for the three- and six-month periods ended June
30, 2004. The significant reduction in margins was also due to weak production
and higher costs at Ocala, where the plant struggled to complete trucks and
incurred significant additional expenses. The plant has experienced temporary
line stoppages due primarily to parts shortages and incomplete bills of
material, which contributed to an increase in inventories during the quarter.
Safety Products
- ---------------
The following table summarizes the Safety Products Group's operating results for
the three- and six-month periods ended June 30, 2004 and 2003, respectively
(dollars in millions):
Three months ended June 30, Six months ended June 30,
---------------------------- ---------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net sales $ 69.4 $ 71.1 $ 138.7 $ 138.3
Operating income (loss) 8.1 7.9 15.8 14.3
Operating margin 11.6% 11.1% 11.4% 10.4%
Safety Products sales declined 2% to $69.4 million in the second quarter of 2004
compared to the second quarter of 2003 and remained flat for the six months
ended June 30, 2004 compared to the same period in the prior year. Despite an
overall sales decline in the second quarter, the Safety Products Group
experienced an increase in sales across all product lines except parking
systems. The decline in parking systems sales reflected weak orders during the
first half of the year coupled with the wind-down of the Dallas/Ft. Worth
International Airport project.
Group operating margin increased to 11.6% from 11.1% in the second quarter of
2004 and 2003, respectively, and to 11.4% for the six months ended June 30, 2004
from 10.4% for the same period in the prior year. During 2003, the operating
margin included restructuring costs to close a facility in the United Kingdom
and reduce the group's workforce amounting to $2.1 million and $2.8 million for
the three- and six-month periods ended June 30, 2003, respectively. The 2004
operating margins reflect weak parking systems performance. In addition to the
adverse impact of low volumes, the business experienced higher warranty-related
charges and reserves for bad debt expense in a foreign branch location.
Tool
- ----
The following table summarizes the Tool Group's operating results for the three-
and six-month periods ended June 30, 2004 and 2003, respectively (dollars in
millions):
Three months ended June 30, Six months ended June 30,
---------------------------- ---------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net sales $ 42.6 $ 39.1 $ 87.2 $ 80.5
Operating income (loss) 4.6 4.2 10.3 8.7
Operating margin 10.9% 10.8% 11.9% 10.8%
Tool sales rose 9% to $42.6 million in the second quarter of 2004 compared to
the second quarter of 2003 and 8% to $87.2 million for the six months ended June
30, 2004 compared to the same period in the prior year. Sales rose for all major
product lines, in particular for metal cutting tooling. US sales were
particularly strong, while sales in Europe declined from the prior year.
Operating margin increased to 10.9% in the second quarter of 2004 from 10.8% in
the second quarter of 2003 and to 11.9% from 10.8% for the six months ended June
30, 2004 and 2003, respectively. The operating margin included restructuring
costs relating to the consolidation of the French production facility into the
Portuguese operations in 2004 and the closure of
20
production facility in New York in 2003. Restructuring costs totaled $.9
million, $.3 million, $.9 million and $.6 million for the three months ended
June 30, 2004 and 2003 and the six months ended June 30, 2004 and 2003,
respectively. Notwithstanding, margins improved broadly across all major product
lines reflecting the higher sales volumes and improved cost structure.
Corporate
- ---------
Corporate expenses rose, as expected, to $5.0 million for the second quarter of
2004 compared to $3.7 million for the second quarter of 2003 and to $9.3 million
from $7.2 million for the six months ended June 30, 2004 and 2003, respectively.
The increase reflects higher legal expenses associated with the hearing loss
litigation, and the Registrant's decision to aggressively defend against those
claims, and higher independent audit and audit staff expense to meet the
requirements of Sarbanes-Oxley Section 404.
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.
The following table summarizes the Registrant's cash flows for the six months
ended June 30, 2004 and 2003, respectively (in millions):
Six months ended June 30,
-----------------------------
2004 2003
------------ ------------
Operating cash flow $ (8.1) $ 47.2
Capital expenditures (11.0) (8.8)
Financial services activities, net 14.3 (.8)
Borrowing activity, net 9.1 (25.8)
Sale of business 7.5
Dividends (9.7) (19.1)
Other 1.9 (.5)
------------ ------------
Decrease in cash and cash equivalents $ (3.5) $ (.3)
============ ============
Operating cash flow totaled -$8.1 million for the quarter, significantly below
the prior year largely because of poor operations with the fire rescue and
refuse truck businesses and a $27.2 million, or 15%, build-up of inventories,
reflecting sluggish truck completions in Ocala and slower deliveries against a
large European multi-truck project. Cash flow is expected to rise sharply in the
second half of 2004 as production improves and deliveries are completed. Also
contributing to the reduction in operating cash flow was $4.1 million in pension
contributions in 2004 and cash payments of $.5 million on the settlement and
termination of certain derivative instruments in 2004 versus $7.2 million in
cash proceeds on terminations in the prior year.
Financial services activities generated $14.3 million in cash flow for the six
months ended June 30, 2004 due to the planned wind-down of the taxable portfolio
and early loan payoffs.
In April 2003, Standard and Poor's lowered the Registrant's debt rating from A-2
to A-3 making the short-term borrowing in the commercial paper market no longer
viable. After drawing on the $300.0 million back-up credit facility to pay off
the commercial paper holders, the Registrant replaced it with a new $250.0
million unsecured revolving credit facility maturing in 2006. The facility
includes covenants relating to a maximum debt-to-capitalization ratio, minimum
net worth and minimum
21
interest coverage ratio. In June 2004, the Registrant renegotiated its revolving
credit facility covenants to exclude restructuring and other one-time charges
and to reduce the minimum interest coverage ratio from 3.0 to 2.5. At the same
time, the size of the facility was reduced to $200.0 million. As of June 30,
2004, the Registrant was in compliance with the financial covenants of its debt
agreements.
As of June 30, 2004, the Registrant had $100.0 million of availability under its
$200.0 million unsecured revolving credit facility maturing in 2006. Borrowings
under this facility bear interest at a variable rate of LIBOR plus a spread of
..93%. The spread is subject to adjustment based on the level of outstanding
borrowings.
At June 30, 2004, the Registrant's manufacturing debt was $292.2 million as
compared to $262.8 million as of December 31, 2003, primarily a function of the
Registrant's negative operating cash flow. Likewise, the debt-to-capitalization
ratio increased to 43% as of June 30, 2004 from 40% as of December 31, 2003.
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 $9.4 million decrease in dividends paid
for the first six months of 2004 versus the same period in 2003.
The Registrant's primary working capital as a percent of net sales was 25.0% and
23.3% as of June 30, 2004 and December 31, 2003, respectively. The increase in
the ratio was primarily due to the build-up of inventories within the US Fire
Rescue production facilities from the aforementioned operational issues.
Contractual Obligations and Commercial Commitments
- --------------------------------------------------
The following table presents a summary of the Registrant's contractual
obligations (in millions):
June 30, December 31,
2004 2003
------------ ------------
Long-term debt obligations $ 373.9 $ 380.6
Operating lease obligations 23.8 27.6
Fair value of interest rate swaps 11.0 9.4
Fair value of foreign currency contracts (1.1) (2.5)
------------ ------------
$ 407.6 $ 415.1
============ ============
The $6.7 million reduction in long-term debt obligations was the result of a
$10.0 million payment on a 6.37% fixed-rate private placement obligation in June
2004, partly offset by $3.3 in other borrowings. The funds for the scheduled
payment were drawn from the Registrant's revolving credit facility. The $1.6
million increase in the fair value liability of the Registrant's interest rate
swaps occurred as a result of market expectations that interest rates will
increase in the future. This shift in the implied yield curve unfavorably
impacted the Registrant's fixed-to-floating interest rate swaps (fair value
contracts). The strengthening of the US dollar against the Euro and Canadian
dollar contributed to the $1.4 million decline in the fair value of the foreign
currency contracts as well as contract settlements.
Refer to Footnote 15 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 June 30, 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.
22
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 June 30, 2004, 39% was used to
support financial services assets.
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 forecasted
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 six months ended
June 30, 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 June 30, 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 June 30, 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 June 30, 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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Footnote 12 of the financial statements included in Part I of this Form 10-Q is
incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At its Annual Meeting of Shareholders held on April 30, 2004, the stockholders
of the Registrant voted on the election of three director nominees to continue
in office until 2007. The voting results are set forth below:
Nominees Votes for Votes withheld
- ----------------- ---------- --------------
Robert M. Gerrity 41,586,703 1,181,706
Robert S. Hamada 41,742,193 1,026,216
Walden W. O'Dell 41,297,305 1,471,103
23
Because the Registrant has a staggered board of directors, the term of office of
the following directors, who were not up for election at the 2004 annual
meeting, continued after the meeting:
To continue in office until 2005: To continue in office until 2006:
- --------------------------------- ---------------------------------
Charles R. Campbell James C. Janning
Paul W. Jones Robert D. Welding
Joan E. Ryan
The stockholders also voted on the appointment of Ernst & Young LLP as the
registered public accounting firm for 2004 as follows:
Votes for Votes against Votes abstained
- ---------- ------------- ---------------
41,703,179 903,318 161,912
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, 2004:
A Current Report on Form 8-K was filed on April 20, 2004, under Items 7 and 9,
reporting the Registrant's press release dated April 20, 2004 that disclosed its
financial results for the quarter ended March 31, 2004.
A Current Report on Form 8-K was filed on July 1, 2004, under Items 5 and 7,
reporting the Registrant's press release dated June 30, 2004 that announced the
implementation of the first steps of a broad restructuring initiative. The
measures included improving the profitability of the fire rescue, refuse truck
body and European tooling businesses, divesting non-strategic business
activities, and improving the Registrant's overhead structure.
24
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
08/11/04 By: /s/ Stephanie K. Kushner
Date ----------------------------------------------------------------
Stephanie K. Kushner, Vice President and Chief Financial Officer
25
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------------------------------------------------------------
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.
26