Federal Signal Corp.

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Federal Signal Corp.

1415 West 22nd Street
Oak Brook, Illinois 60521-9945
U.S.A.
(708) 954-2000
Fax: (708) 954-2030

Public Company
Incorporated: 1901 as Federal Electric Co.
Employees: 4,426
Sales: $565 million
Stock Exchanges: New York
SICs: 3669 Communications Equipment, Nee.; 3993 Sign and Advertising Displays; 3545 Machine Tool Accessories; 3711 Motor Vehicles and Car Bodies

Federal Signal Corp., the nation’s leading manufacturer of emergency vehicles and street sweepers, also produces signaling and communications equipment, industrial tools, and signs. Since its inception in 1901, Federal Signal has quietly but steadily grown into a diversified international corporation, primarily through acquiring key companies for its four principal divisions: commercial signs, alarm signals, industrial tools, and emergency vehicles.

Federal Signal was founded as the Federal Electric Co. in Chicago by brothers John and James Gilchrist and a partner John Goehst. At the turn of the century, Goehst and John Gilchrist worked for the burgeoning Commonwealth Edison Co., Goehst as an electrical engineer and Gilchrist as assistant to the manager of electricity sales. With $10,000 in capital, Goehst’s technical skills, and Gilchrist’s sales savvy, the team came up with the idea to develop and market store signs lit by incandescent lamps. Incorporated in 1901, the Federal Electric Co. was one of the first electric sign companies in the nation.

As electricity became common in businesses across the Midwest, Federal Electric’s sign sales grew, and, in 1915, the company diversified its product line by purchasing the patents for an electrically operated siren. Federal Electric sold its sirens primarily to police and fire departments as well as coal mines, which needed an efficient way of warning miners of emergencies, while its electric light signs were used primarily at pharmacies, stores, and the kiosks of early nickelodeon movies.

During this time, Federal Electric came under the ownership of Commonwealth Edison, eventually becoming a part of the utilities empire owned by Commonwealth founder Samuel In-sull. In the early 1930s, however, Insult’s empire crumbled under the weight of the Great Depression, and Federal Electric was spun-off as an independent business under the name Federal Sign and Signal Corp.

The company’s sales continued to grow, as new applications were discovered for its signs and signals. During World War II, Federal provided sirens to warn Londoners of incoming air raids, and, after the war, the company’s signs were used to illuminate Las Vegas casinos. By 1961, Federal Sign and Signal had gone public, trading on the NASDAQ market. Net income reached $1 million that year, and sales hit a record $15 million.

During the 1960s, demand for illuminated signs increased dramatically. Over 4,200 independent businesses were in operation by 1970, and Federal became the largest supplier of electric signs in the United States. Unlike other companies in the industry, Federal leased its signs and also maintained them on a regular basis; this value-added service bolstered Federal’s profitability and stability. In fact, by 1970, the sign division accounted for 46 percent of Federal’s total revenues of $59.8 million, and, of that 46 percent, the sign maintenance business brought in 13 percent.

The market for protective fire equipment also grew considerably, and Federal’s signal division profited from the growth. Revenues from its fire warning systems, fire-truck lights, and public address systems grew an average of eight to ten percent a year. By the late 1960s, Federal’s signal division was outpacing its sign division, growing at a rate of 15 percent annually. Two products that brought in considerable revenues for Federal were its Autocall automatic fire warning system and VASCAR (Visual Average Speed Recorder and Computer), a speed detector that Federal had sold to police in fifteen states within one year.

Federal adopted an acquisitions policy in the late 1960s, which allowed the company to develop businesses in the transportation services industry. In 1968, Federal made four acquisitions: Western Industries Inc. and Cullen-Friestedt (makers of rail bed maintenance equipment, rail-road crossing gates, and other safety devices); Aircraft Equipment Company (a manufacturer of airport ground support equipment); and Autocall Company. By 1971, the company operated four divisions: sign, signal, aerosupport, and Western-Cullen rail. The company streamlined operations in 1973, selling Aerol Co., a maker of wheels for its airport ground support equipment, and C. J. Anderson & Co., an elevator equipment supplier.

In 1975, Federal appointed Karl F. Hoenecke president and chief operating officer of the company. Hoenecke began focusing on developing Federal’s niche markets, and the company’s name was changed to Federal Signal Corp. that year, in order to reflect its business more accurately. Under Hoenecke, Federal sold off holdings that proved slow or unprofitable, including the relatively healthy but small Western-Cullen rail division, which was sold for over $3 million to a group of investors in 1977.

During the 1970s, the majority of Federal’s customers were state, county, and municipal governments, which purchased equipment by soliciting bids from independent contractors. In 1975, 70 percent of all civil defense warning systems sold in the United States were manufactured by Federal’s signal division. Sales topped $29 million, providing 40 percent of the company’s total volume. Three years later, however, the Federal Trade Commission (FTC) accused Federal of attempting to monopolize the market. Specifically, the FTC alleged that Federal had collaborated with local governments to devise the advertisements soliciting bids and providing job specifications, and that these advertisements were designed to prevent other companies from bidding successfully. While the charges were under investigation, Federal was prohibited from selling civil defense warning systems, radio equipment, sirens, and speed detectors to any government body. Ultimately, the issue was settled out of court.

In 1979, Federal established a vehicle division, when it acquired Emergency One Inc., a five-year-old Florida manufacturer that had pioneered the use of aluminum bodies for fire trucks. Three years later, this division also began overseeing operations of another new acquisition, the Elgin Sweeper Co., a leading manufacturer of high-powered, high-speed street sweeping machines. The company also established an industrial tools division during this time, with the purchase of a manufacturer of tools for cutting and stamping metal. Bolstered by high sales volume in its vehicle and signal division, Federal experienced rapid success in the early 1980s; in 1985, third quarter profits alone jumped 46 percent to $2.9 million, and the company appeared poised for further growth.

However, several challenges surfaced in 1986. That summer, union contract negotiations failed at Federal’s Chicago-based signal plant, as well as at its Elgin street-sweeping plant. Workers walked out, production at both plants was severely curtailed for several months, and profits rose by only two percent, 11 percent below the company’s average growth. In September, Federal replaced all striking workers at its Elgin plant. Although the strikes had a negative short-term impact on profits, management was able to reduce labor costs at both plants by 20 to 25 percent and announced that both production operations would remain profitable due to “lower, competitive labor costs.”

Sales in the commercial sign business were also slow in 1986, due to the slumping economy, which greatly curtailed construction of new office and shopping centers. Although the commercial sign business had expanded its product line to offer electronic message boards and time and temperature indicators, the division—once Federal’s strongest—brought in only 16 percent of company revenues, down from over 70 percent in the mid-1960s. Federal’s new tool group was the company’s strongest division, bringing in over 40 percent of earnings on 18 percent of company-wide sales.

Also in 1986, Hoenecke, a hemophiliac, died of AIDS after receiving a blood transfusion infected with the HIV virus. Joseph J. Ross, Federal’s general counsel, was chosen to replace Hoenecke as president and chief operating officer. Finding that Federal’s profits were tied up in excessive inventories, inefficient factories, and highly inflated working capital, Ross moved to ensure Federal’s continued growth.

According to Ross, part of the problem in Federal’s signal division was its outdated manufacturing facilities. At that time, the company relied on one assembly line to manufacture over 2,500 different products, and in order to begin manufacturing of one product, another had to be completed. This process greatly hindered Federal’s ability to deliver goods to customers on a timely basis and resulted in excessive inventories ($24 million in 1988). Under Ross’ leadership, Federal instituted a “work cell” process of manufacturing at its facilities; separate areas were created for building different products. With the new process, Federal was able to produce higher quality products, control inventory, and better respond to customer demands. By 1992, inventory in the signal division had fallen to $10 million from $24 million and operating margins were 12.5 percent, up from ten percent in 1986.

Between 1988 and 1992, Federal began a program of international expansion, purchasing four companies, including Dutch and Canadian fire truck manufacturers and a German producer of tool bits. By 1992, Federal’s overseas sales had quadrupled to $120 million. Moreover, with a wide array of new products and a new financing service to attract buyers, Federal’s vehicle division continued to grow despite a stagnant market. Emergency One’s fire vehicles sales jumped six-fold from 1986 to 1989, with the light-weight, fuel efficient aluminum fire trucks becoming so popular that they drove its largest competitor, American La-France, into bankruptcy in the mid-1980s. Elgin street sweepers also led the nation in sales, and, by 1991, the vehicle unit held 30 percent of the U.S. market for both fire engines and street sweepers, a far greater percentage than any of its competitors.

In 1990, Federal’s market position in all four divisions was strong. Despite the fact that its largest client base, city governments, experienced financial problems due to cuts in federal outlays for vehicles and signals, Federal had an order backlog of over $200 million. Revenues totaled $439 million, and net income hit a record $28.1 million. Federal increased its exports by 50 percent during this time and also received its largest contract: a $47 million order from the U.S. Air Force to furnish components for its rescue vehicles.

Although Federal controlled over one-third of the country’s market for commercial signs, the sign division continued to perform poorly due to a continuing slump in commercial construction. As the recession continued into the early 1990s, the sign division posted a $1 million operating loss on sales of $59 million, and the tool group also showed lackluster growth. However, weak sales in the sign and tool groups were offset by a 37 percent gain in Federal’s vehicle division. The signal division also performed well through the recession and continued to gain market share as several of its smaller competitors went out of business. In 1991, Federal reported an overall 12 percent gain in net income on revenues of $467 million.

In 1992, Federal acquired the Ravo Group, a Dutch street-sweeper manufacturer with annual sales of about $20 million, and, the following year, it purchased VAMA, a Spanish siren manufacturer. As the company continued purchasing foreign operations in its four main groups, international sales grew to comprise 20 percent of Federal’s total sales volume in 1993, up from 13 percent in 1990.

Federal’s sign group began to make a comeback in 1993 fueled by a swell in retail outlet construction and new business from riverboat casinos. Growth also picked up in the tool industry, both in the United States and abroad; income and sales grew ten and 12 percent, respectively. The vehicle and signal groups also continued to post impressive gains in both domestic and overseas market, leading Federal to once again post record earnings of $39.8 million on revenues of $565 million.

Anticipating stronger sales in foreign markets, particularly when the economic recession in the European Community abated, Federal planned to expand into other eastern European countries as well as in the Pacific Rim and Latin America. The company enjoyed practically no debt in the mid-1990s and continued to hold the top U.S. market position for signs as well as fire-fighting and street-sweeping equipment. Moreover, while these markets proved slow at times, Federal was sure of continued sales; Ross commented in a 1993 issue of Forbes magazine that government clients were not likely to say “We have no money so we won’t put out fires.”