FEDERAL SIGNAL CORP /DE/ - Quarter Report: 2008 September (Form 10-Q)
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2008
OR
| o | 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 Company as specified in its charter)
| Delaware (State or other jurisdiction of incorporation or organization) |
36-1063330 (I.R.S. Employer Identification No.) |
1415 West 22nd Street
Oak Brook, IL 60523
(Address of principal executive offices) (Zip code)
Oak Brook, IL 60523
(Address of principal executive offices) (Zip code)
(630) 954-2000
(Company’s telephone number including area code)
(Company’s telephone number including area code)
Not applicable
(Former name, former address, and former fiscal year, if changed since last report)
(Former name, former address, and former fiscal year, if changed since last report)
Indicate by check mark whether the Company (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 Company was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions
of “large accelerated filer,” “accelerated filer” and “smaller reporting
company” in Rule 12b-2 of the
Exchange Act. (Check one):
| Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
| (Do not check if a smaller reporting company) |
Indicate by check mark whether the Company is a shell Company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the Company’s classes of common stock, as
of the latest practicable date.
| Title Common Stock, $1.00 par value |
47,399,026 shares outstanding at October 13, 2008 |
FEDERAL SIGNAL CORPORATION
INDEX TO FORM 10-Q
INDEX TO FORM 10-Q
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Part I. Financial Information
Item 1. Financial Statements
FORWARD-LOOKING STATEMENTS
This Form 10-Q, reports filed by Federal Signal Corporation and Subsidiaries (“the Company”) with
the Securities and Exchange Commission (“SEC”) and comments made by management may contain words
such as “may,” “will,” “believe,” “expect,” “anticipate,” “intend,” “plan,” “project,” “estimate”
and “objective” or the negative thereof or similar terminology concerning the Company’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
Company’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 Company’s actual results,
performance or achievements to be materially different.
These risks and uncertainties, some of which are beyond the Company’s control, include the cyclical
nature of the Company’s industrial and municipal markets, technological advances by competitors,
risks associated with dealers and distributors, risks associated with system conversions, increased
warranty and product liability expenses, risks associated with supplier and other partner
alliances, changes in cost competitiveness including those resulting from foreign currency
movements, disruptions in the supply of parts or components from sole source suppliers and
subcontractors, commodity price escalation, availability of credit, retention of key employees and
general changes in the competitive environment in which the Company operates.
ADDITIONAL INFORMATION
The Company makes its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports
on Form 8-K, other reports and information filed with the SEC 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 Company’s filings may be read or copied at the SEC’s Public Reference Room at 100 F Street,
N.E., Room 1580, Washington, DC 20549. Information on the operation of the Public Reference Room
can be obtained by calling the SEC at 1-202-551-8090. 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.
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FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| ($ in millions, except per share data) | 2008 | 2007 | 2008 | 2007 | ||||||||||||
Net sales |
$ | 226.5 | $ | 228.5 | $ | 709.0 | $ | 684.7 | ||||||||
Costs and expenses: |
||||||||||||||||
Cost of sales |
(167.6 | ) | (164.4 | ) | (522.3 | ) | (498.0 | ) | ||||||||
Selling, general and administrative |
(46.1 | ) | (44.5 | ) | (142.5 | ) | (127.7 | ) | ||||||||
Operating income |
12.8 | 19.6 | 44.2 | 59.0 | ||||||||||||
Interest expense |
(4.1 | ) | (6.4 | ) | (16.4 | ) | (18.2 | ) | ||||||||
Other expense, net |
(0.1 | ) | (0.3 | ) | (1.9 | ) | (1.0 | ) | ||||||||
Income before income taxes |
8.6 | 12.9 | 25.9 | 39.8 | ||||||||||||
Income tax benefit (expense) |
6.2 | (2.7 | ) | 1.2 | (10.1 | ) | ||||||||||
Income from continuing operations |
14.8 | 10.2 | 27.1 | 29.7 | ||||||||||||
(Loss) gain from discontinued operations and
disposal, net of income tax benefit (expense),
of $3.5, $3.1, $20.3 and $(2.0), respectively |
(0.6 | ) | (5.7 | ) | (111.2 | ) | 16.5 | |||||||||
Net income (loss) |
$ | 14.2 | $ | 4.5 | $ | (84.1 | ) | $ | 46.2 | |||||||
COMMON STOCK DATA: |
||||||||||||||||
Basic and diluted earnings per share: |
||||||||||||||||
Earnings from continuing operations |
$ | 0.31 | $ | 0.21 | $ | 0.57 | $ | 0.62 | ||||||||
(Loss) earnings from discontinued operations and
disposal |
(0.01 | ) | (0.12 | ) | (2.33 | ) | 0.35 | |||||||||
Earnings (loss) per share |
$ | 0.30 | $ | 0.09 | $ | (1.76 | ) | $ | 0.97 | |||||||
Weighted average common shares outstanding: |
||||||||||||||||
Basic |
47.6 | 47.8 | 47.7 | 47.9 | ||||||||||||
Diluted |
47.6 | 47.8 | 47.7 | 47.9 | ||||||||||||
Cash dividends per share of common stock |
$ | 0.06 | $ | 0.06 | $ | 0.18 | $ | 0.18 | ||||||||
See notes to condensed consolidated financial statements.
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FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (Unaudited)
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| ($ in millions) | 2008 | 2007 | 2008 | 2007 | ||||||||||||
Net income (loss) |
$ | 14.2 | $ | 4.5 | $ | (84.1 | ) | $ | 46.2 | |||||||
Other comprehensive (loss) income, net of tax — |
||||||||||||||||
Foreign currency translation |
(6.9 | ) | 3.0 | (3.2 | ) | 9.4 | ||||||||||
Net derivative gain (loss), cash flow hedges |
0.8 | (1.2 | ) | 1.7 | (2.6 | ) | ||||||||||
Amortization of actuarial pension loss, net |
0.7 | 0.4 | 1.3 | 0.4 | ||||||||||||
Comprehensive income (loss) |
$ | 8.8 | $ | 6.7 | $ | (84.3 | ) | $ | 53.4 | |||||||
See notes to condensed consolidated financial statements.
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FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
| September 30, | December 31, | |||||||
| ($ in millions) | 2008 | 2007 (a) | ||||||
ASSETS |
||||||||
Manufacturing activities: |
||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 15.8 | $ | 12.5 | ||||
Accounts receivable, net of allowances for doubtful accounts of
$2.4 million and $3.8 million, respectively |
141.9 | 147.8 | ||||||
Inventories |
134.8 | 121.8 | ||||||
Other current assets |
50.3 | 28.6 | ||||||
Total current assets |
342.8 | 310.7 | ||||||
Properties and equipment, net |
64.0 | 59.6 | ||||||
Other assets |
||||||||
Goodwill |
341.2 | 344.7 | ||||||
Intangible assets, net of accumulated amortization |
58.0 | 65.2 | ||||||
Deferred charges and other assets |
8.3 | 7.2 | ||||||
Total manufacturing assets |
814.3 | 787.4 | ||||||
Assets of discontinued operations |
10.5 | 231.8 | ||||||
Financial services activities — lease financing and other receivables, net of
allowances for doubtful accounts of $3.1 million and $3.6 million, respectively |
11.0 | 146.8 | ||||||
Total assets |
$ | 835.8 | $ | 1,166.0 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||
Manufacturing activities: |
||||||||
Current liabilities |
||||||||
Short-term borrowings |
$ | 1.7 | $ | 2.6 | ||||
Current portion of long-term borrowings |
25.1 | 45.4 | ||||||
Accounts payable |
60.8 | 66.2 | ||||||
Accrued liabilities |
||||||||
Compensation and withholding taxes |
20.7 | 26.8 | ||||||
Customer deposits |
22.6 | 17.7 | ||||||
Other |
55.7 | 53.6 | ||||||
Total current liabilities |
186.6 | 212.3 | ||||||
Long-term borrowings |
207.0 | 240.7 | ||||||
Long-term pension and other liabilities |
47.7 | 32.3 | ||||||
Deferred income taxes |
18.6 | 25.2 | ||||||
Total manufacturing liabilities |
459.9 | 510.5 | ||||||
Liabilities of discontinued operations |
17.6 | 72.8 | ||||||
Financial services activities — Borrowings |
10.1 | 137.4 | ||||||
Total liabilities |
487.6 | 720.7 | ||||||
Shareholders’ equity |
||||||||
Common stock, $1 par value per share, 90.0 million shares authorized,
49.3 million and 49.4 million shares issued, respectively |
49.3 | 49.4 | ||||||
Capital in excess of par value |
105.4 | 103.2 | ||||||
Retained earnings |
240.8 | 333.8 | ||||||
Treasury stock, 1.9 million and 1.5 million shares at cost, respectively |
(36.1 | ) | (30.1 | ) | ||||
Accumulated other comprehensive (loss) income: |
||||||||
Foreign currency translation, net |
12.7 | 15.9 | ||||||
Net derivative loss, cash flow hedges |
(0.3 | ) | (2.0 | ) | ||||
Unrecognized pension and postretirement losses, net |
(23.6 | ) | (24.9 | ) | ||||
Total |
(11.2 | ) | (11.0 | ) | ||||
Total shareholders’ equity |
348.2 | 445.3 | ||||||
Total liabilities and shareholders’ equity |
$ | 835.8 | $ | 1,166.0 | ||||
See notes to condensed consolidated financial statements.
| (a) | The balance sheet at December 31, 2007 has been derived from the audited financial
statements at that date and has been revised for discontinued operations. |
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FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
| Nine months ended September 30, | ||||||||
| ($ in millions) | 2008 | 2007 | ||||||
Operating activities: |
||||||||
Net (loss) income |
$ | (84.1 | ) | $ | 46.2 | |||
Adjustments to reconcile net (loss) income to net cash provided
by operating activities: |
||||||||
Loss (gain) on discontinued operations and disposal |
111.2 | (16.5 | ) | |||||
Depreciation and amortization |
12.1 | 8.8 | ||||||
Stock based compensation expense |
2.1 | 3.9 | ||||||
Lease financing and other receivables |
135.7 | 21.7 | ||||||
Pension contributions |
(8.2 | ) | (6.2 | ) | ||||
Working capital (1) |
(13.3 | ) | (16.6 | ) | ||||
Other |
(6.6 | ) | 20.1 | |||||
Net cash provided by continuing operating activities |
148.9 | 61.4 | ||||||
Net cash used for discontinued operating activities |
(19.6 | ) | (17.1 | ) | ||||
Net cash provided by operating activities |
129.3 | 44.3 | ||||||
Investing activities: |
||||||||
Purchases of properties and equipment |
(18.9 | ) | (14.5 | ) | ||||
Proceeds from sales of properties, plant and equipment, net |
35.8 | — | ||||||
Payment for acquisitions, net of cash acquired |
— | (139.2 | ) | |||||
Other, net |
0.8 | (2.0 | ) | |||||
Net cash provided by (used for) continuing investing activities |
17.7 | (155.7 | ) | |||||
Net cash provided by discontinued investing activities |
54.5 | 61.2 | ||||||
Net cash provided by (used for) investing activities |
72.2 | (94.5 | ) | |||||
Financing activities: |
||||||||
Decrease in short-term borrowings, net |
(1.4 | ) | (26.5 | ) | ||||
(Payments on) proceeds from long-term borrowings, net |
(182.1 | ) | 92.7 | |||||
Purchases of treasury stock |
(6.0 | ) | — | |||||
Cash dividends paid to shareholders |
(8.6 | ) | (8.6 | ) | ||||
Other, net |
(0.1 | ) | (0.2 | ) | ||||
Net cash (used for) provided by continuing financing activities |
(198.2 | ) | 57.4 | |||||
Net cash (used for) provided by financing activities |
(198.2 | ) | 57.4 | |||||
Effects of foreign exchange rate changes on cash |
— | 0.6 | ||||||
Increase in cash and cash equivalents |
3.3 | 7.8 | ||||||
Cash and cash equivalents at beginning of period |
12.5 | 15.7 | ||||||
Cash and cash equivalents at end of period |
$ | 15.8 | $ | 23.5 | ||||
| (1) | Working capital is composed of net accounts receivable, inventories, accounts payable
and customer deposits. |
See notes to condensed consolidated financial statements.
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FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements of Federal Signal Corporation and
subsidiaries (the “Company”) included herein have been prepared by the Company, 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 Company believes
that the disclosures are adequate to ensure the information presented is not misleading.
These condensed consolidated financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto included in the Company’s Annual
Report on Form 10-K for the fiscal year ended December 31, 2007.
In the opinion of the management of the Company, the information contained herein reflects
all adjustments necessary to present fairly the Company’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 nine month periods ended
September 30, 2008 are not necessarily indicative of the results to be expected for the
full year of 2008.
The Company reports its interim quarterly periods on a 13-week basis ending on a Saturday
with the fiscal year ending on December 31. For presentation, the Company uses “September
30, 2008” to refer to its financial position as of September 27, 2008 and its results of
operations for the 13-week and 39-week periods ended September 27, 2008.
2. SIGNIFICANT ACCOUNTING POLICIES
Reclassifications: Certain balances in 2007 have been reclassified to conform to the 2008
presentation. Included with the reclassifications are restatements for discontinued
operations. The discontinued operations arise out of the Fire Rescue Group and Tool
segments.
Earnings per share: Basic earnings per share (EPS) is computed by dividing net income by
the weighted average common shares outstanding, which totaled 47.6 million and 47.8 million
for the quarters ended September 30, 2008 and 2007, respectively, and 47.7 million and 47.9
million for the nine month periods ended September 30, 2008 and 2007, respectively.
Diluted earnings per share is calculated by dividing net income by the weighted average
common shares outstanding plus additional common shares that would have been outstanding
assuming the exercise of stock options and performance share units that are dilutive. The
Company uses the treasury stock method to calculate dilutive shares. For the quarter
ended September 30, 2008 and 2007, 28,370 and 1,097 employee stock options, respectively;
and 0 and 4,842 employee stock options for the nine month periods ended September 30, 2008
and 2007, respectively, were considered potential dilutive common shares. The weighted
average number of shares outstanding, for diluted earnings per share was 47.6 million and
47.8 million for the quarters ended September 30, 2008 and 2007, respectively; and 47.7
million and 47.9 million for the nine months ended September 30, 2008 and 2007,
respectively. Options to purchase 2.0 million and 2.2 million shares of common stock were
excluded from the calculation of the number of shares outstanding for diluted EPS for the
three months ended September 30, 2008 and 2007, respectively because their effects were
antidilutive. For the nine months ended September 30, 2008 and 2007, options to purchase
2.5 million and 2.1 million shares of common stock, respectively, were excluded from the
calculation of the number of shares outstanding as their effects were antidilutive. For the nine months ended
September 30, 2008, 56,391 performance share units were also excluded from the calculation of the number
of shares outstanding for diluted earnings per share because their effects were
antidilutive.
Fair value of financial instruments: In September 2006, the Financial Accounting Standards
Board (FASB) issued FAS 157, “Fair Value Measurements,” which defines fair value,
establishes a framework for measuring fair value in generally accepted accounting
principles (“GAAP”) and expands disclosure about fair value measurements. In February 2008,
the FASB issued FASB Staff Position No. 157-b, “Effective Date of FASB Statement No. 157”
(“FSP 157-b”), which provides a one year deferral of the effective date of FAS 157 for
non-financial assets and non-financial liabilities, except those that are recognized or
disclosed in the financial statements at fair value at least annually. In accordance with
this interpretation, the Company has only adopted the provisions of FAS 157 with respect to
its financial assets and liabilities that are measured at fair value within the financial
statements as of January 1, 2008. The adoption of FAS 157 did not have a material impact
on the Company’s fair value measurements. The provisions of FAS 157 have not been applied
to non-financial assets and non-financial liabilities.
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In February 2007, the FASB issued FAS 159, “The Fair Value Option for Financial Assets and
Financial Liabilities—including an amendment to FASB Statement No. 115,” which permits
entities to choose to measure many financial instruments and certain other items at fair
value that are not currently required to be measured at fair value. The Company adopted
this statement as of January 1, 2008 and has elected not to apply the fair value option to
any of its financial instruments at this time.
Split-dollar life insurance arrangements: In September 2006, the EITF issued EITF 06-04,
“Accounting for Deferred Compensation and Postretirement Benefit Aspects of Split-Dollar Life
Insurance Arrangements”. EITF 06-04 concludes that an employer should recognize a liability
for post-employment benefits promised to an employee. This guidance is effective for fiscal
years beginning after December 15, 2007. The Company has one arrangement that meets these
criteria and has recorded a liability of approximately $0.3 million in 2008.
3. INVENTORIES
Inventories are summarized as follows:
| September 30, | December 31, | |||||||
| 2008 | 2007 | |||||||
Raw materials |
$ | 70.5 | $ | 62.3 | ||||
Work in progress |
33.6 | 26.4 | ||||||
Finished goods |
30.7 | 33.1 | ||||||
Total inventories |
$ | 134.8 | $ | 121.8 | ||||
4. INCOME TAXES
The Company’s effective tax rate was (71.5)% and 21.1% for the three month periods ended
September 30, 2008 and 2007, respectively.
The tax rate for the three month period ending September 30, 2008, reflects a tax
benefit of $8.2 million for the utilization of capital loss carry forwards resulting from the
sale-leaseback transactions for two US based manufacturing facilities. The tax rate for
the three month period ended September 30, 2008 also reflects a benefit for the manufacturer’s
deduction of (1.2)%.
The three month period ending September 30, 2007, reflects R & D tax credit benefits of about
1.0% that are not reflected in the three month period ended September 30, 2008, as Congress
had not yet extended the credit. The tax rate for the three month period ending September 30,
2007 also reflects a higher tax benefit for tax-exempt interest of 1.1% and a higher tax
benefit for foreign tax effects of 9.2% associated with foreign dividends paid in that
quarter.
The Company’s effective tax rate was (4.9)% and 25.3% for the
nine month periods ended September 30, 2008 and 2007, respectively. The tax rate for the nine month period ending September 30, 2008, reflects the benefit of $8.2 million
resulting from the sale-leaseback transaction in the third quarter of 2008.
On January 1, 2007, the Company adopted the provisions of FIN 48. As a result, an increase of
$0.7 million in the liability for unrecognized tax benefits and a $0.7 million reduction in
retained earnings were recorded in 2007.
The Company’s unrecognized tax benefits were $8.2 million at January 1, 2008 of which $5.8
million of tax benefits that if recognized, would reduce the annual effective tax rate. The
Company’s continuing practice is to recognize interest and penalties related to income tax
matters in income tax expense. Interest and penalties amounting to $0.8 million and $0.1
million respectively are included in the consolidated balance sheet at September 30, 2008.
During the third quarter of 2008, unrecognized tax benefits of $1.9 million were released
within discontinued operations due to the expiration of a statute in certain foreign tax
jurisdictions. The Company does not expect its unrecognized tax benefits to change
significantly over the next 12 months.
5. POSTRETIREMENT BENEFITS
The components of the Company’s net periodic pension expense for its defined benefit pension
plans are summarized as follows:
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| US Benefit Plans | Non-US Benefit Plan | |||||||||||||||||||||||||||||||
| Three months ended | Nine months ended | Three months ended | Nine months ended | |||||||||||||||||||||||||||||
| September 30, | September 30, | September 30, | September 30, | |||||||||||||||||||||||||||||
| 2008 | 2007 | 2008 | 2007 | 2008 | 2007 | 2008 | 2007 | |||||||||||||||||||||||||
Service cost |
$ | 0.1 | $ | 0.4 | $ | 0.7 | $ | 1.4 | $ | 0.1 | $ | 0.1 | $ | 0.2 | $ | 0.3 | ||||||||||||||||
Interest cost |
2.1 | 2.2 | 6.6 | 6.6 | 0.8 | 0.8 | 2.6 | 2.4 | ||||||||||||||||||||||||
Expected return on plan assets |
(2.6 | ) | (2.8 | ) | (8.2 | ) | (8.2 | ) | (1.0 | ) | (1.0 | ) | (3.2 | ) | (3.0 | ) | ||||||||||||||||
Amortization of actuarial loss |
0.1 | 0.6 | 0.5 | 1.2 | 0.1 | 0.1 | 0.4 | 0.3 | ||||||||||||||||||||||||
Curtailment charge |
0.4 | |||||||||||||||||||||||||||||||
Settlement charge |
2.4 | |||||||||||||||||||||||||||||||
Net periodic pension (income) expense |
$ | (0.3 | ) | $ | 0.4 | $ | 2.4 | $ | 1.0 | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
On April 21, 2008, the Company sold its Die & Mold Operations. The operations were included in
discontinued operations for all periods presented through the sale date. As a result of the
amendment related to the sale of the Tool business, the Company was required to recognize a
curtailment adjustment of $0.4 million and a settlement charge of $2.4 million under SFAS No.
88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Plans and for
Termination Benefits”. Pension expense relating to the Tool segment employees, excluding the
previously mentioned charges, was $0.3 million for the nine months ended September 30, 2008.
The remeasurement of these defined benefit plans as a result of the sale of the Die & Mold
Operations also included a change in the weighted average discount rate from 6.45% used at
year-end 2007 to 6.8% at the July 1, 2008 remeasurement date, the impact of which was to
decrease pension expense by $0.5 million and $0.8 million in the three and nine months ended
September 30, 2008, respectively. The projected benefit obligation was reduced by $17.3
million and the accumulated benefit obligation by $8.7 million as a result of these changes.
The Company contributed $7.0 million and $5.0 million during the nine months ended September
30, 2008 and 2007, respectively to its US defined benefit plans and $1.2 million to its
non-US defined benefit plan during the nine months ended September 30, 2008 and 2007.
6. FINANCIAL ASSETS
On June 27, 2008 the Company sold approximately 53% of its municipal leasing portfolio to Banc
of America Public Capital Corp. for proceeds of $53.5 million, which approximated book value.
On the same day, the Company paid down its borrowings under the loan agreement with Banc of
America Leasing & Capital, LLC in the amount of $46.7 million.
During the third quarter, the Company sold, for approximately book value, an additional $40.3
million of its municipal leasing portfolio to Banc of America Public Capital Corp. The
remaining portfolio totals less than $3.0 million at September 30, 2008.
Also during the quarter, the Company repaid in full the $35.8 million its subsidiaries
had outstanding under the loan agreement with Banc of America Leasing & Capital, LLC.
7. DISCONTINUED OPERATIONS
The following table presents the operating results of the Company’s discontinued operations for
the three and nine month periods ended September 30, 2008 and 2007:
| Three months ended | Nine months ended | |||||||||||||||
| September 30, | September 30, | September 30, | September 30, | |||||||||||||
| E-ONE (Fire Rescue Segment) | 2008 | 2007 | 2008 | 2007 | ||||||||||||
Net sales |
$ | 26.1 | $ | 47.5 | $ | 157.1 | $ | 138.8 | ||||||||
Costs and expenses |
(28.5 | ) | (57.1 | ) | (168.4 | ) | (155.9 | ) | ||||||||
Loss before income taxes |
(2.4 | ) | (9.6 | ) | (11.3 | ) | (17.1 | ) | ||||||||
Income tax (expense) benefit |
(0.9 | ) | 3.6 | 4.9 | 6.4 | |||||||||||
Loss on discontinued operations |
$ | (3.3 | ) | $ | (6.0 | ) | $ | (6.4 | ) | $ | (10.7 | ) | ||||
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| Three months ended | Nine months ended | |||||||||||||||
| September 30, | September 30, | September 30, | September 30, | |||||||||||||
| Die & Mold Operations (Tool Segment) | 2008 | 2007 | 2008 | 2007 | ||||||||||||
Net sales |
$ | — | $ | 29.6 | $ | 39.7 | $ | 89.2 | ||||||||
Costs and expenses |
(0.3 | ) | (28.5 | ) | (38.6 | ) | (84.3 | ) | ||||||||
(Loss) income before income taxes |
(0.3 | ) | 1.1 | 1.1 | 4.9 | |||||||||||
Income tax expense |
— | (0.5 | ) | (0.7 | ) | (2.0 | ) | |||||||||
(Loss) income on discontinued operations |
$ | (0.3 | ) | $ | 0.6 | $ | 0.4 | $ | 2.9 | |||||||
Refuse and Cutting Tool Operations (ESG and Tool Segments)
| Three months ended | Nine months ended | |||||||||||||||
| September 30, | September 30, | September 30, | September 30, | |||||||||||||
| 2008 | 2007 | 2008 | 2007 | |||||||||||||
Net sales |
$ | — | $ | — | $ | — | $ | 3.0 | ||||||||
Costs and expenses |
— | — | — | (2.8 | ) | |||||||||||
Income before income taxes |
— | — | — | 0.2 | ||||||||||||
Income tax benefit (expense) |
1.9 | — | 1.9 | (0.2 | ) | |||||||||||
Income on discontinued operations |
$ | 1.9 | $ | — | $ | 1.9 | $ | — | ||||||||
On August 5, 2008 the Company sold
E-ONE, located in Ocala, Florida for approximately $20 million subject to an initial working
capital adjustment that resulted in cash proceeds of $0.5 million at closing. The ultimate cash
proceeds are subject to final working capital and other adjustments currently expected to be
concluded by year end. The after-tax loss on the sale for the nine month period
ended September 30, 2008 of $76.9 million, related primarily to after-tax impairment charges
that reflect the fair value of the net assets and the impairment of $6.2 million of goodwill
attributable to the E-ONE business.
On April 21, 2008, the Company completed the sale of Dayton Progress Corporation (excluding
Dayton Hong Kong) and its subsidiary, PCS Company, referred to collectively as “Die and Mold
Operations” for $65.5 million. The after-tax loss on disposal for the nine month period ended
September 30, 2008 was $28.8 million primarily due to asset impairments; included in the loss
on disposal is the remaining goodwill of the Tool Group of $55.8 million. The Company has also
decided to close the Dayton Hong Kong operation incurring a $4.9 million pre-tax impairment charge
related to this business for the nine month period ended September 30, 2008. The Die and Mold
operations produced special precision perforating components for metal stamping applications
and tooling components for the plastic injection mold and the die cast industries. Sale
proceeds have been used to repay debt.
On January 31, 2007, the Company completed the sale of Manchester Tool Company, On Time
Machining Company and Clapp Dico, referred to collectively as the “Cutting Tool Operations” for
$65.4 million resulting in a $24.3 million net gain on disposal of discontinued operations for
the nine months ended September 30, 2007.
In December 2005, the Company determined that its investment in the Refuse business operating
under the Leach brand name, was no longer strategic. The majority of the assets of the
business have been sold since that time and the operation has been shut down. For the nine
month period ended September 30, 2008 the Company recorded an after-tax gain of $3.5 million
primarily related to a revision in the estimate of product liability reserves.
The following table shows an analysis of assets and liabilities of discontinued operations as
of September 30, 2008 and December 31, 2007:
| September 30, | December 31, | |||||||
($ in millions) |
2008 | 2007 | ||||||
Current assets |
$ | 1.9 | $ | 129.4 | ||||
Properties and equipment |
0.3 | 38.0 | ||||||
Long-term assets |
8.3 | 64.4 | ||||||
Total assets |
$ | 10.5 | $ | 231.8 | ||||
Current liabilities |
$ | 7.0 | $ | 49.8 | ||||
Long-term liabilities |
10.6 | 23.0 | ||||||
Total liabilities |
$ | 17.6 | $ | 72.8 | ||||
8. LEGAL PROCEEDINGS
The Company 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 Company’s
business. The Company 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
Company’s consolidated financial position or the results of operations. However, in the event
of unexpected future
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developments, it is possible that the ultimate resolution of such matters,
if unfavorable, could have a material adverse effect on the Company’s results of operations.
The Company has been sued in Chicago, Illinois by firefighters seeking damages claiming that
exposure to the Company’s sirens has impaired their hearing and that the sirens are therefore
defective. There are presently 33 cases filed during the period 1999-2004, involving a total of
2,443 plaintiffs pending in the Circuit Court of Cook County, Illinois. The trial of the first
27 of these
plaintiffs’ claims began on March 18, 2008 and ended on April 25, 2008, when a Cook County jury
returned a unanimous verdict in favor of the Company and absolved the Company of any liability
for all 27 of these claims, which had been consolidated for trial. Since the first trial
concluded, the court has dismissed, at plaintiffs’ request, another 39 plaintiffs’ cases which
had been selected for trial in September 2008. An additional 40 Chicago firefighter plaintiffs
have been selected for trial currently scheduled for January 5, 2009. Since their selection,
at plaintiffs’ request, four of these firefighters have been dismissed. Additional trial dates
of Chicago plaintiff firefighters are scheduled during 2009 and 2010.
Federal Signal has been sued outside of the Cook County venue. With the exception of matters
on appeal, Federal Signal is currently a defendant in 11 such hearing loss lawsuits in 3
states, involving a total of 13 plaintiffs. With the exception of two plaintiffs who have
filed suit in New Jersey, all current plaintiffs outside of Illinois have stipulated to or
claimed less than $75,000 in damages. Four cases in the Supreme Court of Kings County, New
York were dismissed on January 25, 2008 after the court granted Federal Signal’s motion to
dismiss which eliminated all claims pending in New York. The Court subsequently denied
reconsideration of its ruling. Plaintiffs have filed a notice of appeal. During May, 2008 all
seven plaintiffs who had filed claims against the Company in Missouri voluntarily dismissed
their claims. In September 2008 two of the four New Jersey plaintiffs voluntarily dismissed
their claims. Since April 2007, three of the eight Maryland plaintiffs have voluntarily
dismissed their claims. Following these dismissals and appeals, plaintiffs currently have
filings in the following trial courts: Maryland (Circuit Courts for Baltimore City, Montgomery
County and Prince George’s County); New Jersey (Essex and Passaic Counties); and Pennsylvania
(Court of Common Pleas of Philadelphia County). Plaintiffs’ attorneys have threatened to file
additional lawsuits. The Company intends to vigorously defend all of these lawsuits. The
Company successfully defended approximately 41 similar cases in Philadelphia, Pennsylvania in
1999 resulting in a series of unanimous jury verdicts in favor of the Company.
Federal Signal’s ongoing negotiations with CNA over insurance coverage resulted in an agreement
under which CNA reimbursed $3.7 million to the Company during the year ended December 31, 2007
for past defense costs. CNA has agreed to cover a percentage of defense costs amounting to
approximately $1.7 million thus far during 2008.
9. SEGMENT INFORMATION
The following table summarizes the Company’s operations by segment for the three and nine month
periods ended September 30, 2008 and 2007:
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2008 | 2007 | 2008 | 2007 | |||||||||||||
Net sales |
||||||||||||||||
Safety and Security Systems |
$ | 90.4 | $ | 94.4 | $ | 276.0 | $ | 269.0 | ||||||||
Fire Rescue |
28.6 | 25.2 | 95.5 | 76.4 | ||||||||||||
Environmental Solutions |
107.5 | 108.9 | 337.5 | 339.3 | ||||||||||||
Total net sales |
$ | 226.5 | $ | 228.5 | $ | 709.0 | $ | 684.7 | ||||||||
Operating income |
||||||||||||||||
Safety and Security Systems |
$ | 8.3 | $ | 12.7 | $ | 27.5 | $ | 36.4 | ||||||||
Fire Rescue |
1.2 | 2.9 | 7.6 | 8.3 | ||||||||||||
Environmental Solutions |
9.1 | 9.5 | 30.0 | 30.8 | ||||||||||||
Corporate expense |
(5.8 | ) | (5.5 | ) | (20.9 | ) | (16.5 | ) | ||||||||
Total operating income |
$ | 12.8 | $ | 19.6 | $ | 44.2 | $ | 59.0 | ||||||||
| September 30, 2008 | December 31, 2007 | |||||||
Identifiable assets |
||||||||
Manufacturing activities |
||||||||
Safety and Security Systems |
$ | 364.2 | $ | 387.3 | ||||
Fire Rescue |
127.3 | 118.3 | ||||||
Environmental Solutions |
290.3 | 251.7 | ||||||
Corporate |
32.5 | 30.1 | ||||||
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| September 30, 2008 | December 31, 2007 | |||||||
Total manufacturing activities |
814.3 | 787.4 | ||||||
Assets of discontinued operations |
10.5 | 231.8 | ||||||
Financial services activities |
||||||||
Fire Rescue |
1.4 | 98.8 | ||||||
Environmental Solutions |
4.9 | 14.1 | ||||||
Corporate |
4.7 | 33.9 | ||||||
Total financial services activities |
11.0 | 146.8 | ||||||
Total identifiable assets |
$ | 835.8 | $ | 1,166.0 | ||||
10. COMMITMENTS AND GUARANTEES
The Company 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 Company conducts business, with warranty periods generally ranging from 6
months to 5 years. The Company 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 Company’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 Company periodically assesses the adequacy of its
recorded warranty liabilities and adjusts the amounts as necessary.
Changes in the Company’s warranty liabilities for the nine month period ended September 30,
2008 and 2007 were as follows:
| Nine months ended September 30, | ||||||||
| 2008 | 2007 | |||||||
Balance at January 1 |
$ | 5.9 | $ | 5.1 | ||||
Provisions to expense |
6.0 | 6.0 | ||||||
Actual costs incurred |
(5.9 | ) | (5.1 | ) | ||||
Balance at September 30 |
$ | 6.0 | $ | 6.0 | ||||
The Company guarantees the debt of a joint venture in China up to a maximum of $12.5 million.
The outstanding amount of the guaranteed debt as of September 30, 2008 was $9.2 million. No
charges associated with this guarantee have been incurred as of September 30, 2008.
The Company 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 Company 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 $2.1 million as of September
30, 2008. No losses have been incurred as of September 30, 2008. The guarantees expire in
2008.
The Dallas Fort Worth (“DFW”) airport gave Federal APD certain notices of non-performance and
default, most recently in March 2008, regarding the $18.0 million contract for installation
of a new parking and revenue control system at the airport, and DFW demanded that Federal APD
cure its alleged non-performance. DFW also provided a copy of the non-performance and
default letters to the Company’s surety carrier. The most recent non-performance and default
claim relates principally to certain disagreements as to the timeliness of certain work under
the contract and whether certain of Federal APD’s work has complied with contract
specifications. DFW terminated the contract effective July 29, 2008. Federal APD disputed
that there was any basis under the contract for the non-performance or default as previously
alleged by DFW, and Federal APD also disputed that DFW is entitled to terminate the contract
for cause and asserts that it is entitled to damages as a result of DFW’s conduct. DFW and
Federal APD each filed lawsuits against the other asserting claims for breach of contract and
other damages arising from the contract and its termination. These lawsuits are currently
pending in the United States District Court for the Northern District of Texas, Dallas
Division. The parties have reached an agreement in principle to settle this dispute,
including all claims asserted in the pending litigation, and the parties are working to
finalize this settlement. The Company established reserves totaling $8.2 million in relation
to this contract and settlement.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
For assets and liabilities measured at fair value on a recurring basis during the period under
the provisions of FAS 157, the Company uses an income approach to value the assets and
liabilities for outstanding derivative contracts which include interest rate swap and foreign
currency forward contracts. These contracts are valued using an income approach which consists
of a
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discounted cash flow model that takes into account the present value of future cash flows
under the terms of the contracts using current market information as of the reporting date such
as prevailing interest rates and foreign currency spot and forward rates. As noted in Note 2,
the Company has adopted the provisions of FAS 157 with respect to its financial assets and
liabilities that are measured at fair value within the condensed consolidated financial
statements. The Company has deferred the application of the provisions of this statement to its
non-financial assets and liabilities in accordance with FSP 157-b. The following table provides
a summary of the fair values of assets and liabilities under FAS 157:
| Fair Value Measurements at September 30, 2008 | ||||||||||||||||
| Quoted Prices in Active | Significant Other | Significant | ||||||||||||||
| Markets for Identical | Observable Inputs | Unobservable Inputs | ||||||||||||||
| Total | Assets (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Assets |
||||||||||||||||
Derivatives |
$ | 5.4 | $ | — | $ | 5.4 | $ | — | ||||||||
| Fair Value Measurements at September 30, 2008 | ||||||||||||||||
| Quoted prices in Active | Significant Other | Significant | ||||||||||||||
| Markets for Identical | Observable Inputs | Unobservable Inputs | ||||||||||||||
| Total | Assets (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Liabilities |
||||||||||||||||
Derivatives |
$ | (1.8 | ) | $ | — | $ | (1.8 | ) | $ | — | ||||||
12. NEW ACCOUNTING PRONOUNCEMENTS
In December 2007, the FASB issued FAS No. 141 (revised 2007), “Business Combinations”
(“FAS 141(R)”), which expands the definition of a business and a business combination, requires
the fair value of the purchase price of an acquisition including the issuance of equity
securities to be determined on the acquisition date, requires that all assets, liabilities,
contingent consideration, contingencies and in-process research and development costs of an
acquired business be recorded at fair value at the acquisition date, requires that acquisition
costs generally be expensed as incurred, requires that restructuring costs generally be
expensed in periods subsequent to the acquisition date, and requires changes in accounting for
deferred tax asset valuation allowances and acquired income tax uncertainties after the
measurement period to impact income tax expense. The Company will be required to adopt
FAS 141(R) on January 1, 2009. The Company does not expect FAS141(R) to have a material impact,
if any, on its results of operations or consolidated financial statements.
In December 2007, the FASB issued FAS No. 160, “Noncontrolling Interests in Consolidated
Financial Statements, an Amendment of ARB No. 51” (“FAS 160”), which changes the accounting and
reporting for minority interests such that minority interests will be recharacterized as
noncontrolling interests and will be required to be reported as a component of equity, and
requires that purchases or sales of equity interests that do not result in a change in control
be accounted for as equity transactions and, upon a loss of control, requires the interest
sold, as well as any interest retained, to be recorded at fair value with any gain or loss
recognized in earnings. The Company will be required to adopt FAS 160 on January 1, 2009. The
Company does not expect FAS 160 to have a material impact if any, on its operations or
consolidated financial statements.
In March 2008, the FASB issued Statement of FAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FAS 133” (“FAS 161”). This new standard
requires enhanced disclosures for derivative instruments, including those used in hedging
activities. It is effective for fiscal years and interim periods beginning after
November 15, 2008, and will be applicable to the Company in the first quarter of fiscal 2009.
The principal impact to the Company will be to require the Company to expand its disclosure
regarding its derivative instruments.
13. SALE LEASEBACK TRANSACTION
In July 2008, the Company entered into sale-leaseback transactions for its Elgin and
University Park, Illinois plant locations. Net proceeds received were $35.8 million
resulting in a deferred gain of $29.0 million. The deferred gain
will be amortized over the
15-year life of the respective leases.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Federal Signal Corporation (the “Company”) manufactures safety, signaling and communication
equipment and systems; articulated aerial devices and a broad range of municipal and industrial
cleaning vehicles. To achieve technology, marketing, distribution and product application
synergies, the Company’s business units are organized and managed in three operating segments:
Safety and Security Systems, Fire Rescue and Environmental Solutions.
Consolidated Results of Operations
The following table presents the Company’s results of operations for the three and nine month
periods ended September 30, 2008 and 2007, respectively (in millions):
| Three months ended | Nine months ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2008 | 2007 | 2008 | 2007 | |||||||||||||
Net sales |
$ | 226.5 | $ | 228.5 | $ | 709.0 | $ | 684.7 | ||||||||
Cost of sales |
(167.6 | ) | (164.4 | ) | (522.3 | ) | (498.0 | ) | ||||||||
Gross profit |
58.9 | 64.1 | 186.7 | 186.7 | ||||||||||||
Operating expenses |
(46.1 | ) | (44.5 | ) | (142.5 | ) | (127.7 | ) | ||||||||
Operating income |
12.8 | 19.6 | 44.2 | 59.0 | ||||||||||||
Interest expense |
(4.1 | ) | (6.4 | ) | (16.4 | ) | (18.2 | ) | ||||||||
Other expense, net |
(0.1 | ) | (0.3 | ) | (1.9 | ) | (1.0 | ) | ||||||||
Income tax benefit (expense) |
6.2 | (2.7 | ) | 1.2 | (10.1 | ) | ||||||||||
Income from continuing operations |
14.8 | 10.2 | 27.1 | 29.7 | ||||||||||||
(Loss) gain
from discontinued operations and disposal, net of tax |
(0.6 | ) | (5.7 | ) | (111.2 | ) | 16.5 | |||||||||
Net income (loss) |
$ | 14.2 | $ | 4.5 | $ | (84.1 | ) | $ | 46.2 | |||||||
Other data: |
||||||||||||||||
Operating margin |
5.7 | % | 8.6 | % | 6.2 | % | 8.6 | % | ||||||||
Earnings per share — continuing operations |
$ | 0.31 | $ | 0.21 | $ | 0.57 | $ | 0.62 | ||||||||
| Three months ended | Nine months ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2008 | 2007 | 2008 | 2007 | |||||||||||||
Analysis of orders: |
||||||||||||||||
Total orders |
$ | 216.4 | $ | 227.7 | $ | 730.1 | $ | 737.1 | ||||||||
Change in orders year over year |
(5 | )% | (1 | )% | ||||||||||||
Change in US municipal and government orders year over year |
(14 | )% | (7 | )% | ||||||||||||
Change in US industrial and commercial orders year over year |
(3 | )% | (4 | )% | ||||||||||||
Change in non-US orders year over year |
1 | % | 5 | % | ||||||||||||
Net sales remained relatively flat in the third quarter of 2008 compared to the same quarter of
2007, attributable to shipments of higher value Fire Rescue vehicles and favorable foreign currency
translation offset by a decrease in the Safety and Security Systems segment. In the nine months
ended September 30, 2008 as compared to 2007, net sales increased 4% due to increases in Fire
Rescue and Safety and Security Systems products.
Operating income declined $6.8 million in the third quarter of 2008 compared to the third quarter
of 2007 due to a $5.2 million charge to settle a dispute and write off assets associated with a
contract to install revenue control equipment at the Dallas Fort Worth (DFW) airport, and to the
absence of a $1.8 million favorable excise tax settlement received in the prior year. Also
impacting earnings negatively was the $0.8 million operational impact of a Gulf hurricane on the
Company’s Houston operations, and the $0.9 million cost associated with hiring a new chief
executive officer. Year to date operating income decreased $14.8 million due to $7.1 million of
increased costs associated with the hearing loss litigation, $6.2 million of increased charges
associated with the DFW contract, and the absence of the $1.8 million favorable excise tax
settlement received in the prior year, partially offset by other cost reductions.
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Interest expense decreased in the third quarter of 2008 to $4.1 million compared to $6.4 million in
the same quarter last year due to lower average borrowings. For the nine months ended September
30, 2008 interest expense was $16.4 million compared to $18.2 million in the same period in 2007.
The Company reduced debt by $183.8 million during the second and third quarters of 2008 following
the divestitures of its Tool segment and its municipal leasing portfolio, and the completion of a
sale-leaseback of its University Park and Elgin plants in Illinois.
The Company’s effective tax rate on earnings from continuing operations was (71.5)% and 21.1% for
the three months ended September 30, 2008 and 2007, respectively. The negative tax rate reflects a
benefit of $8.2 million for utilization of capital loss carry forwards resulting from the gain
generated on the sale-leaseback transaction.
Income from continuing operations was $14.8 million for the quarter ended September 30, 2008 versus
$10.2 million for the comparable period in 2007 due to the $8.2 million tax benefit noted above.
For the nine month period ended September 30, 2008, income from continuing operations decreased
$2.6 million from the prior year period due to the aforementioned operating expenses offset in part
by the capital loss tax benefit.
For the quarter ended September 30, 2008 a loss on discontinued operations and disposals of $0.6
million was recorded. For the nine month period ended September 30, 2008, there was a net loss of
$111.2 million on discontinued operations relating primarily to the impairment of assets of the Die
& Mold and E-ONE operations. For the nine month period ended September 30, 2007, after completion
of the sale of the cutting tool operations in the first quarter of 2007, and substantial completion
of the wind-down of the refuse business, the Company realized a net after-tax gain on the sale of
previously discontinued operations of $24.3 million.
Diluted earnings per share from continuing operations increased 48% to $0.31 for the quarter ended
September 30, 2008. For the nine months ended September 30, 2008, diluted earnings per share from
continuing operations decreased 8%.
Orders and Backlog
Orders decreased 5% from the third quarter of 2007 driven by a weakness in the Company’s US
municipal and government markets. Year to date orders remained relatively flat compared to the
prior year period as weak US markets were nearly offset by higher reported international orders
which increased mainly due to translation effects of the weaker US dollar in the period.
The third quarter decrease of 14% in US municipal and government orders from the year ago
comparable period came primarily as a result of lower orders for sweepers of $2.8 million, warning
systems of $1.2 million and a $2.4 million decline in police products. Year to date US municipal
and government orders decreased 7% from 2007 primarily as a result of decreased orders of sweepers
of $12.1 million and a $10.5 million decline in police products offset by an increase in Automated
License Plate Recognition (ALPR) cameras of $5.7 million.
The 3% decline in US industrial and commercial orders in the third quarter was caused by a
reduction in parking system orders of $3.3 million partly offset by increases in environmental
solutions orders of $1.4 million. Year to date industrial and commercial orders decreased 4% from
2007 driven by lower orders for sweepers and vacuum trucks which were down $9.6 million.
Non-US orders were above prior year both in the third quarter and the year to date periods due
principally to the favorable effects of foreign currency translation.
Backlog at $347.0 million increased 10% over the same period in 2007, as the continued strong demand
for Bronto aerial devices more than offset a decrease in parking systems backlog, due to the
wind-down of the $47.0 million contract with the Port Authority of New York and New Jersey.
Safety and Security Systems
The following table summarizes the Safety and Security Systems Group operating results for the
three and nine month periods ended September 30, 2008 and 2007, respectively (dollars in millions):
16
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| Three months ended | Nine months ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2008 | 2007 | 2008 | 2007 | |||||||||||||
Total orders |
$ | 86.7 | $ | 88.5 | $ | 281.2 | $ | 279.5 | ||||||||
US orders |
46.4 | 54.0 | 155.7 | 166.5 | ||||||||||||
Non-US orders |
40.3 | 34.5 | 125.5 | 113.0 | ||||||||||||
Net sales |
90.4 | 94.4 | 276.0 | 269.0 | ||||||||||||
Operating income |
8.3 | 12.7 | 27.5 | 36.4 | ||||||||||||
Operating margin |
9.2 | % | 13.5 | % | 10.0 | % | 13.5 | % | ||||||||
A 2% decrease in orders from the third quarter of 2007 was driven by the softness in the domestic
police and parking business, partially offset by increased orders for ALPR cameras relating to the
PIPS business acquired in the third quarter of 2007. US orders decreased 14% from the prior year
due to decreased municipal spending and demand for police, outdoor warning and parking products.
Non-US orders rose 17% over the prior year with nearly all product groups contributing to the
increase. Year to date, orders increased slightly over 2007 as the full-period benefit of the PIPS
business was offset largely by weakness in the police markets.
Net sales decreased 4% compared to the third quarter of 2007 due to lower US shipments of police
products and parking systems, and the disruptive impact of a Gulf hurricane where the Group’s
domestic hazardous lighting operations are based. Offsetting these factors were the addition of
sales of ALPR cameras due to the PIPS acquisition in August, 2007. Net sales increased 3% in the
nine month period ended September 30, 2008, as the full-period benefit of the PIPS business and
improved demand for warning sirens were offset partly by weak demand for police products.
Operating income and margins decreased in the third quarter of 2008 from the comparable period in
2007 primarily due to $6.0 million of increased charges to settle a dispute and write off assets
associated with the DFW contract, offset by improved sales mix from shipments of higher margin ALPR
cameras. Year to date, operating margin and income declined mainly due to $6.2 million of increased
charges associated with the DFW contract and costs associated with the start up of the Public
Safety Systems division.
Fire Rescue
The following table summarizes the Fire Rescue Group’s operating results for the three and nine
month periods ended September 30, 2008 and 2007, respectively (dollars in millions):
| Three months ended | Nine months ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2008 | 2007 | 2008 | 2007 | |||||||||||||
Total orders |
$ | 34.7 | $ | 36.5 | $ | 138.5 | $ | 136.3 | ||||||||
US orders |
1.7 | 1.3 | 8.2 | 5.1 | ||||||||||||
Non-US orders |
33.0 | 35.2 | 130.3 | 131.2 | ||||||||||||
Net sales |
28.6 | 25.2 | 95.5 | 76.4 | ||||||||||||
Operating income |
1.2 | 2.9 | 7.6 | 8.3 | ||||||||||||
Operating margin |
4.2 | % | 11.5 | % | 8.0 | % | 10.9 | % | ||||||||
Segment results have been restated to exclude the results of the E-ONE business, which have been
presented as discontinued operations.
Orders decreased 5% from the third quarter of 2007, as market demand for construction industry
related aerial equipment slowed in Europe from the prior year comparable period. Continued strong
demand for fire related aerial equipment was not sufficient to offset the weakness in non-fire
related industries. Year to date orders were in line with 2007, boosted by an increase in
fire-related orders in the US market and by a favorable foreign currency exchange rate. Excluding
foreign exchange, orders decreased 9% year over year, exhibiting softness in the commercial and
industrial markets in Europe.
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Net sales increased by 13% and 25% in the third quarter and year to date periods, respectively, as
compared to the prior year periods. Favorable foreign currency translation was a primary driver for the increase
in the quarter. Higher vehicle shipments and the impact of favorable foreign currency translation drove
the increase in the year to date period.
Operating income decreased $1.7 million from the third quarter of 2007, and operating margin
decreased 7.3 percentage points mainly due to an unfavorable mix of shipments to markets that are
more highly competitive. The benefits associated with the plant capacity expansion are expected to
impact fourth quarter production costs, as subcontractor costs begin to diminish. Costs associated
with moving into the expanded plant, additional promotion and launch costs associated with the next
generation product range and higher bad debt associated with a failed UK dealer also adversely
affected results for the period. For the nine months ended September 30, 2008, operating income
decreased 8% from the same period last year, impacted by unfavorable sales mix and costs associated
with the plant expansion and product launch.
The Bronto plant expansion project in Pori, Finland was completed during the quarter, adding
approximately 40% to production capacity, providing the business with the opportunity to more
cost-effectively meet demand and reduce backlog.
Environmental Solutions
The following table summarizes the Environmental Solutions Group’s operating results for the three
and nine month periods ended September 30, 2008 and 2007, respectively (dollars in millions):
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2008 | 2007 | 2008 | 2007 | |||||||||||||
Total orders |
$ | 95.0 | $ | 102.7 | $ | 310.4 | $ | 321.3 | ||||||||
US orders |
72.9 | 78.1 | 223.3 | 239.8 | ||||||||||||
Non-US orders |
22.1 | 24.6 | 87.1 | 81.5 | ||||||||||||
Net sales |
107.5 | 108.9 | 337.5 | 339.3 | ||||||||||||
Operating income |
9.1 | 9.5 | 30.0 | 30.8 | ||||||||||||
Operating margin |
8.5 | % | 8.7 | % | 8.9 | % | 9.1 | % | ||||||||
Orders of $95.0 million in the third quarter of 2008 were 7% below the prior year quarter. US
orders decreased 7% from the same period last year, with decreases in sweepers and sewer cleaners
more than offsetting the increase in industrial vacuum trucks. Non-US orders decreased 10%
compared to the prior year quarter, primarily due to vacuum trucks partially offset by stronger
European sweeper orders. Year to date orders declined 3% as compared to the prior year with the
decrease in US orders of 7% being partially offset by an increase in non-US orders of 7%.
Net sales remained relatively flat compared to the third quarter in 2007 as a decrease in sweeper
shipments were offset by increases in sewer cleaners and industrial vacuums as well as higher
pricing on products sold. Year to date net sales were also flat versus the prior year.
In the third quarter and year-to-date periods, operating income decreased 4% and 3% respectively,
compared to the same prior year periods, due to the absence of a favorable $1.8 million excise tax
settlement which occurred in 2007, and the $0.4 million adverse impact of a Gulf hurricane.
Largely offsetting were reduced operating expenses, due in part to lower incentive compensation
plan expenses.
Corporate Expenses
Corporate expenses increased slightly to $5.8 million for the third quarter of 2008 compared to
$5.5 million in the third quarter of 2007. The increase is due to $0.4 million of higher legal
costs associated with the Company’s ongoing firefighter hearing loss litigation and $0.9 million of
costs associated with the hiring of a new CEO, offset by cost reductions. Corporate expenses for
the nine months ended September 30, 2008 were $20.9 million and $16.5 million for the comparable
period in 2007 with $7.1 million of the increase caused by higher hearing loss litigation expense,
offset by lower bonus and stock based compensation costs of $3.7 million.
Discontinued Operations
On April 21, 2008, Dayton Progress Corporation (excluding Dayton Hong Kong) and PCS Corporation,
referred to
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collectively as the “Die and Mold Operations” were sold. The Company also decided to close Dayton
Hong Kong. The closure will be completed in 2008. These operations are included as discontinued
operations for all periods presented. Previously, the Die and Mold Operations were included in the
Company’s Tool Segment.
On August 5, 2008 the Company sold E-ONE, located in Ocala, Florida for
approximately $20 million subject to an initial working capital adjustment that resulted in
cash proceeds of $0.5 million at closing. The ultimate cash proceeds are subject to final
working capital and other adjustments currently expected to be
concluded by year end. These
operations are included as discontinued operations for all periods presented. Previously E-ONE
operations were included in the Company’s Fire Rescue segment.
Also included as discontinued operations is the Company’s investment in the Refuse business,
operating under the Leach brand name. The majority of the assets of this business have been sold,
and the operation was closed in 2006.
For the quarter ended September 30, 2008 a loss on discontinued operations and disposals of $0.6
million was recorded. For the nine month period ended September 30, 2008, there was a net loss of
$111.2 million on discontinued operations relating primarily to the impairment of assets of the Die
& Mold and E-ONE operations.
There was a net gain of $16.5 million on discontinued operations for the nine month period ended
September 30, 2007 primarily relating to the sale of the Cutting Tool operations.
Seasonality of Company’s Business
Certain of the Company’s businesses are susceptible to the influences of seasonal buying or
delivery patterns. The Company’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, aerial
equipment, outdoor warning, emergency signaling products and parking systems.
Financial Position, Liquidity and Capital Resources
The Company 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, pension contributions, debt
repayments, share repurchases and dividends.
The following table summarizes the Company’s cash flows for the nine month period ended September
30, 2008 and 2007, respectively (in millions):
| Nine months ended September 30, | ||||||||
| 2008 | 2007 | |||||||
Operating cash flow |
$ | 129.3 | $ | 44.3 | ||||
Investing, net |
72.2 | (94.5 | ) | |||||
Debt (repayments) borrowings, net |
(183.5 | ) | 66.2 | |||||
Dividends |
(8.6 | ) | (8.6 | ) | ||||
Purchases of treasury stock |
(6.0 | ) | — | |||||
Other, net |
(0.1 | ) | 0.4 | |||||
Increase in cash and cash equivalents |
$ | 3.3 | $ | 7.8 | ||||
Cash provided by operations totaled $43.4 million in the third quarter of 2008 and $129.3 million
year to date. The increase from 2007 was primarily attributable to the sale of 93% of the
Company’s municipal leasing portfolio for $93.8 million.
The Company’s investing
activities in 2008 include net cash proceeds of $35.8 million received from the
sale-leaseback transactions of two US based plants, gross cash proceeds of $66.0 million received
to date from the divestitures of its Die and Mold Operations and E-ONE business, less purchases of
property plant and equipment totaling $18.9 million. Investing activities in 2007 include gross
cash proceeds of $65.4 million received from the sale of its Cutting Tool Operations, less the
acquisitions of PIPS, Codespear and Riverchase totaling $141.9 million, and purchases of property
plant and equipment of $14.5 million.
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Manufacturing debt net of cash as a percentage of capitalization was 38.6% at September 30, 2008,
versus 38.8% at the end of 2007.
At September 30, 2008, $60.1 million was drawn against the Company’s revolving credit facility
which provides for borrowings up to $250.0 million and matures April 25, 2012. Borrowings under
the facility bear interest, at the Company’s option, at the Base Rate or LIBOR, plus an applicable
margin. The applicable margin ranges from 0.00% to 0.75% for Base Rate borrowings and 1.00% to
2.00% for LIBOR borrowings depending on the Company’s total indebtedness to capital ratio. At
September 30, 2008, the Company’s applicable margin over LIBOR and Base Rate borrowings was 1.50%
and 0.25%, respectively.
The Company’s revolving credit facility and private placement notes contain certain financial
covenants for each fiscal quarter end. At September 30, 2008, the Company was in compliance with
its covenants and expects to be in compliance for the balance of the year.
During the current downturn in global financial markets, some companies have experienced
difficulties accessing their cash equivalents, trading investment securities, drawing on revolvers,
issuing debt and raising capital generally, which have had a material adverse impact on their
liquidity. Given the Company’s cash position and debt structure, the diversity and strength of the
ten banks in its revolving credit facility, and its anticipated cash usage over the next 12 months,
the Company has not experienced any material issues and it continues to expect its liquidity,
notwithstanding these adverse market conditions, will be sufficient to meet all its anticipated
needs during the next twelve months and for the foreseeable future.
Contractual Obligations and Commercial Commitments
Short-term borrowings decreased $0.9 million to $1.7 million at September 30, 2008 from $2.6
million at December 31, 2007. Total long-term borrowings decreased to $242.2 million from $423.5
million at December 31, 2007. See the Financial Condition, Liquidity and Cash Flow section of this
report for more information. There have been no other significant changes in the first nine months
of 2008 to the Company’s contractual obligations and commercial commitments as summarized in the
Management’s Discussion and Analysis of Financial Condition and Results of Operations in the
Company’s Annual Report on Form 10-K for the year ended December 31, 2007 and subsequent Form 10-Q
filings for the quarters ended March 31, 2008 and June 30, 2008.
Changes to the Company’s accrual for product warranty claims in the first nine months of 2008 is
discussed in Note 10.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is subject to market risk associated with changes in interest rates and foreign
exchange rates. To mitigate this risk, the Company utilizes interest rate swaps and foreign
currency forward and option contracts. The Company does not hold or issue derivative financial
instruments for trading or speculative purposes and is not party to leveraged derivatives.
The Company manages its exposure to interest rate movements by maintaining a proportionate
relationship between fixed-rate debt to total debt within established percentages. The Company uses
funded fixed and floating-rate borrowings as well as interest rate swap agreements to balance its
overall fixed-to-floating interest rate mix.
The Company also has foreign exchange exposures related to buying and selling in currencies other
than the local currency in which it operates. The Company utilizes foreign currency forward
contracts to manage risks associated with sales and purchase commitments as well as forecasted
transactions denominated in foreign currencies.
The information contained in Note 10, “Commitments and Guarantees” to the Condensed Consolidated
Financial Statements of this Form 10-Q discusses the changes in the Company’s exposure to market
risk during the nine month period ended September 30, 2008. For additional information, refer to
the discussion contained under the caption “Market Risk Management” included in Item 7 of the
Company’s Form 10-K for the year ended December 31, 2007.
Item 4. Controls and Procedures
As required by Rule 13a-15 under the Securities Exchange Act of 1934, the Company’s management,
with the participation of the Company’s Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of the design and operation of the Company’s disclosure controls and
procedures as of September 30, 2008. Based on that evaluation, the Company’s Chief Executive
Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures
were effective as of September 30, 2008. As a matter of practice, the Company’s management
continues to review and document disclosure controls and procedures, including internal controls
and procedures for financial reporting. From time to time, the Company 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 September 30, 2008, there were no changes in the Company’s
internal control over financial reporting that have materially affected, or are reasonably likely
to materially affect, the Company’s internal control over financial reporting.
Part II. Other Information
Item 1. Legal Proceedings
The information is set forth in Footnote 8 and Footnote 10 of the financial statements included in
Part I of this Form 10-Q are incorporated herein by reference.
Item 1A. Risk Factors
The risk factors described in Item 1A (“Risk Factors”) of the Company’s Annual Report on Form 10-K
for the year ended December 31, 2007 are being updated to include the following new risk factors.
The execution of our growth strategy is dependent upon the continued availability of credit and
third-party financing arrangements for our customers.
The recent economic downturn has resulted in tighter credit markets, which could adversely affect
our customers’ ability to secure the financing necessary to proceed or continue with purchases of
our products and services. Our customers’ or potential customers’ inability to secure financing
for projects could result in the delay, cancellation or down-sizing of new purchases or the
suspension of purchases already under contract, which could cause a decline in the demand for our
products and services and negatively impact our revenues and earnings.
We rely on access to financial markets to finance a portion of our working capital requirements and
support our liquidity needs. Access to these markets may be adversely affected by factors beyond
our control, including turmoil in the financial services industry, volatility in securities trading
markets and general economic downturns.
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We draw upon our revolving credit facility and our operating cash flow to fund working capital
needs, capital expenditures, strategic acquisitions, pension contributions, debt repayments, share
repurchases and dividends. Market disruptions such as those currently being experienced in the US
and abroad have materially impacted liquidity in the credit and debt markets, making financing
terms for borrowers less attractive, and in certain cases have resulted in the unavailability of
certain types of financing. Continued uncertainty in the financial markets may negatively impact
our ability to access additional financing or to refinance our existing credit facility or existing
debt arrangements on favorable terms or at all, which could negatively affect our ability to fund
current and future operations as well as future acquisitions and development. These disruptions
may include turmoil in the financial services industry, unprecedented volatility in the markets
where our outstanding securities trade, and general economic downturns in the areas where we do
business. If we are unable to access monies at competitive rates, or if our short-term or
long-term borrowings costs dramatically increase, our ability to finance our operations, meet our
short-term obligations and implement our operating strategy could be adversely affected.
Item 5. Other Information.
On October 30, 2008, the Company issued a press release announcing its financial results for the
three and nine months ended September 30, 2008. The full text of the press release is included as
Exhibit 99.1 to this Form 10-Q.
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Item 6. 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
Exhibit 99.1 — Press Release dated October 30, 2008
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Federal Signal Corporation |
||||
| Date: October 31, 2008 | By: | /s/ Stephanie K. Kushner | ||
| Stephanie K. Kushner, Senior Vice President and Chief Financial Officer | ||||
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EXHIBIT INDEX
| Exhibit No. | Description | |
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 | |
Exhibit 99.1 —
|
Press Release dated October 30, 2008 |
25