Federal Signal Corp (FSS) 2002 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Federal Signal Corporation Third Quarter Earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. If anyone should require assistance during the program, please press star, then zero on your touch-tone telephone. And as a reminder, ladies and gentlemen, this conference call is being recorded.

I would now like to introduce your host for today's conference call, Ms. Stephanie Kushner, Vice President and Chief Financial Officer. Ma'am, you may begin.

Thank you. Good morning and welcome. As is traditional on this type of call, I'll start by reminding you that some of our comments will contain forward-looking statements about the future prospects for Federal Signal.

Please return to our - please refer to our latest annual report to shareholders, our recent SEC filings and our press release that we've issued in conjunction with this call for more detailed discussions of risks involved in these forward-looking statements. I'll start with some highlights of Q3 results. Our diluted earnings per share from continuing operations totaled 28 cents.

This is up 40 percent from 20 cents in 2001, and at the bottom end of the 28 to 32 cent range we provided in our most recent conference call. Against our guidance, our net operating results were about flat with lower fire rescue results offset by improvements in the other businesses.

Below the operating line, we were adversely affected by two cents per share due to the non-cash revaluation of an interest rate flop and we were positively affected by two cents per share due to a reduction in our effective tax rate. Orders were up 15 percent against a weak 2001 third quarter, and exceeded sales by $29 million or 11 percent.

Fire rescue markets remain strong and we booked a few large orders in our other businesses, including finalization of the $19 million base contract award for the Dallas/Ft. Worth parking system, Dallas/Ft. Worth Airport parking system, a large fleet order for sweepers for the California Highway Authority and a large police light and siren sale and installation for the Spanish National Police.

Our total backlog rose to $428 million reflecting strong orders, slower than planned production at fire rescue, and the addition of the backlog for the Leach Company. The Leach acquisition closed on the last day of the quarter. At quarter end, backlog for fire rescue was $298 million, $73 million for environmental products, 47 million for safety products and $10 million for tools.

Our sales totaled $262 million for the quarter, up two percent from the prior quarter and three percent above the - quarter last year. The increase primarily reflects stronger international sales across all businesses. I'll talk about group results and we'll just preface this by saying that in this discussion all the comparisons are on an apples-to-apples basis with respect to the change in accounting for good will.

This is consistent with the presentation we used in our press release and it's intended to separate the operational and packs (ph) from the accounting effects. I will remind you that the curtailment of good will amortization is benefiting our 2002 accounts by about three cents a quarter and 12 cents for the year.

On an accounting neutral basis, then, our gross profit margin was 28.3 percent this quarter, versus 28 percent in 2001, with slight improvement in all businesses except for fire rescue. Our operating income was $21.6 million or 8.3 percent of sales, slightly up from the prior year and last quarter, and this is within the range of the guidance we provided at eight to nine percent.

By group, third quarter environmental products sales were down three percent from last year, a little bit better than we had indicated in our guidance, but this group is clearly still being impacted by weak industrial and municipal cleaner markets. The operating margin for environmental products was nine percent, about one percentage point above our predicted range. The increase last year was attributable to lower products development costs and warranty expenses.

Fire rescue orders remain strong. We're up 16 percent year-to-date and 28 percent in the quarter. Versus last year, a favorable quarterly comparison reflects in part the order hiatus that we experienced in 2001, which was the first year of the Fire Act Grant program. Third quarter sales for fire rescue were six percent above the prior year, a smaller increase than we had expected because of ongoing production difficulties, which are constraining our sales level.

And our operating margin was a disappointing 3.6 percent, about half the 2001 level and slightly below the margin we experienced in the second quarter of this year. Safety products orders rose 26 percent. They benefited from finalization of that Dallas/Ft. Worth parking system award. Sales were up six percent from the prior year and earnings five percent.

Tool sales at $39 million were four percent above prior year. This was slightly below the second quarter of this year, but we would expect that because of seasonality. Earnings were up significantly due to the volume leverage and the lower cost structure in this business. Continuing down the income statement, interest expense was $4.7 million, down 25 percent last year.

We're benefiting from the low short-term interest rates and also a modest reduction in our net debt. Our other expense rose in the quarter to $1.3 million. Here, the downward reduction in interest rates penalized our quarterly earnings. We were required to mark to market an interest rate flop, which did not receive hedge accounting treatment.

We took a non-cash charge of $1.3 million in the quarter, which can be best thought of as pre-expensing of interest. We have since that time canceled the optionality in this slot, which insures that the $2 million cumulative expense will be reversed to income ratably over the remaining five plus year life of the slot. Our effective tax rate in the quarter was reduced to 20 percent versus 27 percent last year which benefited us by two cents per share. The rate reduction was taken to bring the full year rate into line with our current full year estimate of 26 percent. This rate reflects relatively more tax for municipal income and the closure of issues associated with prior year tax returns.

Regarding cash flow, our third quarter operating cash flow was $20 million, bringing year-to-date cash generated up to $77 million, up slightly from last year. We believe we're on track to exceed $90 million in cash this year. Nine-month capital spending was $12.9 million, down slightly from last year and continuing to be below depreciation.

At quarter end, looking at the balance sheet, including the monies that were paid to acquire the Leach refuse truck business, our debt totaled $450 million of which $242 million was for our manufacturing businesses. Our ratio of debt to total capitalization declined to 41 percent. On October 3, we closed to the Wittke transaction and paid out cash and stocks and took on some added debt.

The net effect of the Wittke transaction, if it had occurred prior to quarter end, would have been to increase our manufacturing debt to $294 million and the ratio of debt to capitalization to 44 percent. This is still below the level a year ago. As we generate cash in the fourth quarter, we believe that ratio will decline by one to two percentage points by year end. I'll give a little guidance for the fourth quarter of 2002.

Environmental products group revenues and operating income should be up at least 15 percent from last year, as the effect of the refuse acquisitions more than offsets the lower sweeper and sewer cleaning sales. Margins should be in the six percent range, about consistent with last year. This includes the impact of a plant consolidation and some head count reductions that we have taken as a result of better operations and ongoing weak markets.

Fire rescue sales should be at about last year's level of just over $100 million. The fourth quarter is traditionally strong for this business. Operating income will improve from the very low run rates we have seen so far this year, but we are cautious in planning a sharp rise given the production difficulties we've been facing. Consequently, we're looking for operating income in the range of five to six-and-a-half percent.

Safety (ph) products should have a very strong quarter with sales up 18 to 20 percent from last year and an operating income margin in the 17 to 19 percent range. This group benefits from initial work on the Dallas/Ft. Worth Airport project and strength in our warning systems and European police products businesses. We are incurring some modest charges in the fourth quarter to reduce our overhead in these businesses.

Tool sales should continue to exceed the prior year. We're forecasting a four to five percent increase in the quarter and operating margins will be in the 10 to 13 percent range, depending on the sales mix. This is significantly above last year when sales fell off sharply and no significant head count reductions had been made.

Some further consolidation has been initiated in these businesses as our operational improvements have allowed us to reduce our fixed costs further. The tax rate should remain at 26 percent. Interest expense should rise slightly from the third quarter due to the additional acquisition-related debt and should be about $5 million in total. In summary then, Q4 will include about two cents of downsizing costs, which have been absorbed in the numbers I gave you in three of the four segments.

There are no downsizing costs associated with fire rescue. Including this impact, we are looking at earnings in the range of 30 to 38 cents per share for the fourth quarter.

I'll turn it over to Joe now.

Thank you, Stephanie. Before I give specific comments on each of our groups, I would like to summarize our major markets even though they've been referred to at various points in our press release.

In the US, as you know, we broadly define our two markets as governmental driven mostly by municipal budgets, but also somewhat by state budgets, and then our industrial commercial markets. With about 40 percent of our sales in the industrial commercial segment, that marketplace remains slow overall, but as you noted from the increase in sales and especially in our tool group, we have seen some slight improvement over the third quarter of last year.

Once again, except for the strength this year in auto production, there is no singular market which is uniquely strong or weak. With respect to our governmental markets, we could best describe the overall trend as reduced spending at both the state and local levels as a result of budgetary issues. As that overall trend applies to us however, we continue to see good demand for our fire rescue products as well as for our indoor and outdoor warning system businesses.

It would appear that the events of one year ago has continued to make these types of purchases a priority and as you all know, there is also a benefit of federal funding in these areas. On the other hand, we have indicated that we have seen slowness in our municipal sewer cleaning products almost since the beginning of this year and we began seeing the slowing in the police warning equipment product line in the second quarter.

Most recently, we have seen slowing of demand for our municipal street sweeping products during this past quarter. This demand pattern is not too unlike the patterns of past recessions with the exception of the unique influence that the events of September 11th have had. On a geographic basis, our nine US markets remain healthy overall.

In the third quarter, our non US orders, which are roughly 25 percent of our total orders, actually increased at a rate slightly greater than our US order rate increased in the quarter. As our international markets themselves are not growing in line with our order increase, we believe we are gaining market share especially in both the municipal and industrial markets of Europe.

We have discussed in the past the major efforts we are focusing on, lean (ph) enterprise and lean (ph) manufacturing (ph), throughout the company. Those efforts have resulted in inventory reductions, cycle time reductions, reduction of space requirements and other process improvements. We will be doing some small plant consolidations in the fourth quarter, which were facilitated in part by our lean (ph) initiatives.

We will be discussing the full year results of our lean (ph) initiatives in greater depth at our January conference call. Moving to our individual groups, as Stephanie noted, our sales were up within our tool group on a year-over-year basis and we expect them to be up somewhat in the fourth quarter, also.

As we noted in the press release, our margins have improved in part as a result of our reduction in head count notwithstanding the slight increase in sales. We believe some of our improvement in processes within the group have enabled us to increase our productivity.

Within our safety products group, all of our major businesses, both municipal and industrial, domestic and international, showed some increase in new orders during the quarter. This is broadly positive for the group and leads to the positive guidance we provided for the fourth quarter. The major product line which did not evidence new order strength was our US police products.

As we stated previously, we believe the combination of the slowing budget coupled with a heavy police focus on spending other than for our type of equipment is the cause of this short-term order pattern. In the commercial industrial segment of this group, especially domestically, much of the increase in new orders is a result of new product offerings throughout that segment of the group rather than as the result of a robust market.

Moving to our environmental products group, we are seeing the most severe order pressure as a result of domestic municipal budgetary issues in this group. As we have seen in past recessions, our environmental products are being impacted to a greater degree than our other domestic municipal product offerings.

Outside the US, most of our activity is in Europe and we have really seen no fundamental change in our view of the European sweeper market going forward. Moving to our industrial business, it remains slow within the group, but it has improved somewhat over this same period of time last year.

From a new products perspective, we continue to invest in new products. We recently induced - introduced a new waterless street sweeper at a national show in the past month or so. To give you a quick idea, while traditional sweepers carry quite a bit of water to hold down the dust as they sweep, this technology avoids that need and among other benefits, allows for more winter sweeping in northern climates.

Our environmental products group is very excited about this and it received a great reception from our dealers at this show. There's a great deal of activity going on within this group right now focused on the integration of the Leach and Wittke acquisitions. Refuse trucks are fundamentally sold through two different channels.

They are sold directly to public and private refuse collection companies and we are in the process of leveraging the direct channels of both Wittke and Leach. The other channel through which refuse trucks are sold is the municipal dealer channel and there we're in the process of consolidating into our existing dealer organization the distribution in that channel for both Wittke and Leach.

There is clearly some short-term disruption from this activity. We are not anticipating, as we have stated before, any positive earnings per share in the fourth quarter, and there may be a slight decrement as a result of these various activities. Looking forward, we are in weak refuse truck markets as we knew at the time of these acquisitions, but we still anticipate that they will be accretive next year as we make progress with our integration activities.

As was apparent from our press release, a major operating issue remains within our fire rescue group. The market itself remains very robust and we believe we have increased our domestic market share as measured by our new order intake during the quarter. However, our current focus is on operational improvement, not on increases in market share. As we have said in the past, quarterly orders can be lumpy, and we don't believe the market was 28 percent higher, the amount by which our orders increased in the quarter.

While overall demand is good, we did see orders coming in earlier in the year than we have seen in past years and as you may recall, we oftentimes have very large fourth quarter order increases. Some of that was pulled forward this year. Our backlog in this group is now just under $300 million, which is up 22 million from the beginning of the third quarter. This increase reflects delivery delays, a healthy market and the earlier ordering by municipalities that I referred to.

This - essentially this backlog converts into production capacity into different periods of time depending on our product lines and roughly, it would say its five-month backlog in our leased custom offerings, up to a 10-month backlog for our most custom offerings. We discussed last quarter that we are increasing employment and expected a sequential increase in sales in Q3 over Q2.

While we have had some increase, it was nowhere near what we had anticipated. From an employee perspective, we have not been able to hire qualified employees at the rates we had anticipated. While we're using overtime to address this issue, it certainly limits our flexibility. We are presently focusing significant additional resources on our hiring efforts.

As we also mentioned in our press release, we had a great deal of highly complex vehicles flowing through our plants in the third quarter, and to a lesser degree, we will also see this in the fourth quarter and the first quarter of next year. Since we had not anticipated such a high number of very complex custom vehicles, we have had difficulty from a staffing viewpoint handling the up front engineering necessary for these vehicles to be produced.

We have increased our resources in this area also in order to be better able to handle the large amount of custom vehicles requiring pre-production engineering. Also, we have spread our deliveries out further less accounting in great part for our reduction in sales forecast for this year compared to our forecast of 90 days ago. We also mentioned new products in our press release. We had a variety of new products in our factories in the third quarter.

We had a new mid-mount aerial that will we'll be introducing. We had new industrial and airport truck offerings. This included the initial test units for our $35 million Netherlands order, which by the way, has allowed - provided our all new composite body. We also introduced through the operations a new risking pumper offering for our domestic municipal market.

And all of these new products incur significantly greater amounts of labor as the prototypes or first test units go through the plant. While this bodes well for our continuing offer of new products going forward, we failed to anticipate the degree of difficulty we would have in our operations as a result of having this many prototype new products going through at the same time and the resulting demand on our labor force.

Going forward, we have modified our systems to give us better visibility of the amount of labor driven by any given mix of high custom and prototype new product vehicles. While we still have to work our way through what we currently have, we anticipate that the third quarter's operating margin should be our low point.

With respect to activity under the assistance to firefighter's grant program, there has currently been awarded approximately 170 million out of the 360 million total to be awarded this calendar year. Of that 170 million, 32 million has been awarded for fire fighting vehicles. We have begun to see some orders as a result of the grants made to date.

Along this line, I would like to clarify a comment I made in our last conference call, when I stated that we received orders from approximately 30 percent of those who receive grants under the 2001 program. Actually we received orders amounting to 30 percent of the dollars awarded under the program.

When you measure it on an individual grant basis, there are a great number of very small grants made for units under $50,000, so on a unit basis, we would have a much smaller share, but in fact we had a share in 2001 in excess of 30 percent on a dollar basis for fire fighting vehicles. As we indicated in our guidance, we anticipate increasing margins going forward.

In addition to the operational improvements we have put in place, we have also been able to recognize increased pricing on new orders over the last four to five months. Therefore, we have greater margins in our present backlog which should benefit us going forward into next year. With respect to next year, our groups will be preparing their plans over the next two months and we will be providing our guidance for the year at our January conference call.

In view of the uncertainty of next year's economic outlook, we felt it best to wait until we had a little more visibility in our businesses. From a directional viewpoint, we are planning on the basis of flat to very slightly increasing industrial commercial markets, and increasing pressure from budgetary constraints within our state and municipal customer set.

Within that broad market overview, we do anticipate increasing operating margins in most of our groups as a result of the combination of some price increases, mostly in our fire group that I referred to. We should see continuing benefits from our lean (ph) initiatives and we anticipate positive results from our increased focus on our corporate purchasing activities and the benefits that will bring to our material costs.

There's been a lot of discussion in the marketplace on pension expenses. We have taken a preliminary look at 2003 and based on our pension assets performance to date, we anticipate an approximate expense of four million in 2003, $4 million, which compares to $1 million which we had spent in this year 2002. Also, we see no requirement for cash funding, either this year or in 2003, but we wouldn't rule out a discretionary contribution if it otherwise makes sense.

That's it for our prepared comments. And now I'll turn it over for questions and answers.

Thank you. Ladies and gentlemen, if you have a question at this time, please press the one key on your touch-tone telephone. If your question has been answered and you wish to remove yourself from the queue, please press the pound key. And if you're on a speakerphone, please lift the handset before asking your question. One moment for our first question.

Our first question comes from David Gold from Sidoti & Company.

Hi. Good morning.

Hi.

Can you - excuse me, speak a little bit on the fire rescue site to basically, what's the constraint in hiring there? What's, you know, kind of been holding up the bulk edges of training or you know, what's basically been the big holdup?

The specific constraint is the experience and quality of the persons we're hiring. We made a decision early in the year and I think we even mentioned that we intended to hire at a rate of 20 a month as opposed to two years ago when we had this same uneven order pattern and we brought in something like 100 people within 90 days. So we have changed our pre-hire regimen significantly in order to reduce our turnover rate once we bring the employees in.

We do different testing. We do different pre-hire requirements, so that of the population that we get applications from, and this is mainly Ocala, Florida I'm referring to, we're getting a much - percentage of hires from the applicant pool than we have - than we anticipated. We expected that the unemployment rates in the area would allow us to hire the quality of person we wanted and to date, that has not been true and we've had to significantly increase our efforts.

OK. And if we continue to look at hiring, let's say at the rate of 20 a month or so. And if you can do that successfully, you know, how far away are we from being ultra staffed to the level that you feel comfortable?

I'd say in Q1 of next year, Q2, we should get into our - a staffing level that will be let's say at journeyman level. End of Q1 but probably more into Q2 will we be at a level that will give us comfort going forward that we have the right number of employees and then can use overtime to flex our needs.

OK. And then just the other question that I have for you. Maybe this is more appropriate for Stephanie. What can you add to the environmental products for the fourth quarter and projection that you guys are looking at is about 15 percent growth there. If we - just sort back in the envelope, take a number for, let's say $30 million from the two acquisition, yes, using I guess 130 or so million dollar run rate, 120 million, that gives us I guess a projection of the core business, actually acquisitions being down about 28 percent or so. Am I right or where am I wrong?

Our fourth quarter on the refuse is going to be a little bit lower than that run rate, because I think you used - and that's a little bit too high for that, but other than that, we are definitely seeing, you know, a reduction in the run rate of the - business.

Got you. All right. Thanks a lot.

Thank you. Our next question comes from Larry Baker from Legg Mason.

Good morning.

Morning.

Just to go back to fire rescue in Ocala. When you do have the engineering - I thought one of the solutions to the complex vehicles was to pull them off line to do the unusual work as opposed to slowing down the line. Is that - is that still the process and is that working?

Yes, that was just the manufacturing end so we don't mix up the engineering issues we have and the manufacturing floor issues we have.

Right.

And let me give you maybe a little more clarity by example. We have been experiencing a much higher increase in orders for our custom rescues and very highly custom rescues since last September. We anticipated some increase but nowhere near what's happened. As a result, our front end engineering has not been able to get those engineering packages to the floor in a timely manner for our production.

Once we get to the production floor separately, we have the issue you're referring to, that we have had separate lines where we would have our less customer vehicles, for example, our tradition vehicles, going down certain lines and we still do that. Our more heavily customized vehicles we have on a separate line so that they are not disrupting the production of say the lower option tradition vehicles, but one twist to that is even on that customized line or lines, we had had a great number of these prototypes you're referring to.

All of the new products and the prototypes and the test products I'm referring to are in the custom end of our business. None of them were in the where we have our tradition series of vehicles. So, while we do have that somewhat separate manufacturing operation, even within that, we have had significant problems because of the - we had a lot more unanticipated labor expense that went into these new product vehicles than we had planned.

OK. And can you talk about the amount of price increase that you - that you've had in fire rescue over the past what, four or five months, did you say?

If we would and we're talking the US now, we would estimate it at about two percent.

And do you have another one by year end or is that sort of just for this year?

At this point, I don't believe we're planning a year-end price increase.

And then, just on the profitability improvement, Joe, if you could. If you look at sort of the improvement you're seeing in the fourth quarter, I think you said five to six-and-a-half percent operating margin at fire rescue, what does that look like going into the first quarter? Are you out of that range by the first quarter?

Again, we don't have a hard first quarter Larry. But we would estimate that we'll have some increase in that margin in the first quarter. It's not going to be dramatic. It will increase throughout the course of the year, but it will not be a significant increase in quarter one, keeping in mind that quarter one often is lower in deliveries. It's - if there's any seasonality, cyclicality in fire rescue production, it's lower deliveries in the first quarter.

OK. So, you expect at this point to drop off from the 100 million level going into the first quarter?

Very likely.

OK. And then finally, on another - I'm trying to go out one year here, but for Stephanie, with 26 percent as the tax rate for '02, what do you think it looks like for '03?

Larry, it's - our tax rate is very much a function of our operating earnings. It moves conversely. And it's difficult for me to give you a tax rate for '03 without giving you a specific earnings range. I will tell you that it will move up as our operating earnings rise.

OK. So you would assume it will be higher than this year's rate, we hope?

Yes.

OK. Thank you.

Thank you. Our next question comes from David Giroux from T. Rowe Price.

Hi. Just a couple of questions. Stephanie, can you talk about sort of the environmental products and you know, the earnings being up substantially last year, relative to last year? How much of that is in the lower warranty expenses?

Is that sort of a one-time thing or is that sort of an ongoing benefit that you're getting? As well as how much were - how much lower one-time price development expenses do you have in this quarter relative to the third quarter of last year?

Let's see. The product development cost was a charge that was in the third quarter of last year and I want to say, you don't know, which, you know, is non-recurring so it was the absence of that charge that we benefited from on a relative basis this year.

And is it also on the - I mean ...

And on the warranty side, I would say that's a one-time benefit in this third quarter, approximately $400,000, which, you know, we would not expect to have recur.

OK. Thank you very much.

Thank you. Once again ladies and gentlemen, if you have a question at this time, please press the one key on your touch-tone telephone.

Our next question comes from Walter Liptak from McDonald Investments.

Hi. Good morning.

Hi.

The guidance that you gave the 30 cents to 38 cents, that's a pretty big range. I guess summing everything up, what's the biggest link factor in our view? Is it the economy or is it the operating margin in fire rescue group? You know, where could you reach that higher end of the guidance?

Really, Walter, I believe it's a combination. I hate to - I can't be much more specific than that, but I can give you the reasons. But I don't think there's a single group that is going to drive that bottom or top of that range. We have a couple of different things going on in the short term. We're unsure of the exact amount of the downsizing.

I would use the term restructuring because we're not taking a separate charge. We intend to do some things with a couple of small plants, so don't know what that expense will be. It's right in our numbers and it's part of that range. We estimate it at two cents, but that's an estimate because we have not accomplished that (ph), so that's one of the swing factors.

Clearly, the operating margin and fire rescue is something that we want to be prepared to deal with. We think we're - we believe that things are put in order to drive the margin we talked about. There's a - you know, we have about a point-and-a-half I believe in the range for that margin on the guidance we gave and we think it's attainable.

But, you know, we're disappointed in the third quarter. The economy, I think that would mostly impact our tool group, a short-term economic factors. Most of our businesses pretty much have their orders in place. I'd say maybe the one exception would be domestic municipal sweeping. As you know, we talked about that. The orders got weak there in the third quarter. That's affecting deliveries in the fourth.

There are still sweeper orders that can come in that will be delivered this quarter, so that could have an impact too. So I guess small impacts from different groups that add up to the total reason for the range of guidance.

OK. Fair enough. The backlog numbers, Stephanie, I didn't get them until you - FRG was 258 I believe? EPG, I didn't get that number.

Sorry. FRG was 298.

Ninety-eight, OK.

Products, 73, 47 for safety products and 10 million for tools.

OK. Can you tell me what those were last quarter?

Yes. They were 67 for environmental, 277 for fire, 32 for safety and 11 for tools.

OK. And the EPG includes some of the Leach backlog, right?

That is correct. Without Leach, the backlog is down mainly as a result of the fall off in sweeper orders.

OK. Can you tell me what it would be - what the core (ph) would be?

Approximately 61 million.

OK. And the backlog in FRG, can you break that out in terms of custom versus commercial truck?

I don't have that number on hand (ph), Walter. We can - we can get back to you on that. I will tell you that it's going to be much greater commercial. Excuse me, I misspoke. I meant custom, much greater custom than it will be the tradition series. It's going to be something like two to one if not three to one, but I do not have that number. We'll get back to you.

OK. And is that also - I guess the question is why are we seeing so many custom trucks being shipped? I would think there was city budget constrained, municipal budget constrained, we'd see more standard orders.

I think what's - our best belief is that one - and it's driven in our opinion by 9/11. A lot of custom rescues, the rescue feature of our products. That's the product line that has had the most significant increase and demand. In fact, going into the year, we are planning on producing the rescues that we anticipated, the custom rescues, with about two-thirds of our capacity at our New York facility.

Moving into even the first quarter of the year and into the second, we changed that around to start using all of their capacity for custom rescues. As we speak now, we are not only producing everything we can there, we are going to start producing more custom rescues in Ocala. So that's been what is driving it. It's the rescue feature of these customized products, the rescue products and they're highly customized.

And why are they getting more custom in view of budgets? My best take on that is that the fire departments of the US now have quite a bit of influence in their local municipalities, especially when it comes to rescue. And there's money being made available for demonstrably beneficial rescue options and that's our best belief on what's going on. It certainly shows in the orders we get.

OK. So the margin problem is in - is out of that New York facility, not at Ocala?

I think not. The Ocala one is also - remember, we talked about the new products and those are all going through Ocala. The Netherlands prototypes, going through Ocala. The new - all new products I referred to, going through Ocala. So, if we had to separate it by plant - the highly customized rescue and the margin issues there are severe in New York. In Ocala, it's more driven by the prototype products.

OK. And then the Fire Act. It sounds like the orders are not - are kind of trickling in. I mean, can you quantify the number of orders that you've gotten related to the Fire Act?

At this - I cannot quantify it. I can tell you they're trickling because there is a lag time. We had some and that's why I used a small number. Our folks are trying to track that. Eventually, we'll be able to give a share as we did before, but in the ongoing process, it's difficult to give a share number.

OK. Are the orders that have come in, are they standard or commercial or, you know, customer commercial?

Don't know that answer Walter, but that's something we'll get back to you on also.

OK. Thank you.

Thank you. Our next question comes from Fred Speece from Speece Thorson Capital.

Yes. Two questions. Of your backlog or orders, whichever you felt like the most meaningful, how much of the total went up sequentially was due to the acquisitions? And you can give both of those.

Above 10 ...

Twelve million.

Twelve million? OK.

Twelve million dollars. The only acquisition that's in there is Leach.

And that's - your backlog's up because of that 12?

Right.

OK. And then, this fire just seems to get started and slips away and what have you. Is it - is it possible that we've designed some neat new products and yet they're not - you're not going to be able to mass produce them as profitably in these price increases weren't enough to offset the customization and the - and the lack of ability to mass produce these?

I think when we talked about the operational changes we've made, in view of this, one of the changes we have made is we have going forward taken a very different position on what type of customized features we will accept. We are still going to be, and always have been, always will be, a custom manufacturer, but we definitely are moving into more for lack of a better term mass customization.

We do have orders and especially in our rescue vehicle backlog that were taken say fourth quarter of last year, first quarter of this year, that kind of timeframe, which has more individualized customization than we would like in order to have profitable manufacture which is the point you're referring to. Moving forward, we have taken a different position on that.

And we will not be as willing to pretty much let a firefighter or department just draw it on a sheet of paper and then we'll build it. We are addressing that issue.

And so that's apparently what happened and you go through distributors so the distributors are, this is a - problem, making promises that are hard to deliver profitably.

Possible except that we have a - you know, our dealers must come back. I mean, the options that we make available are in our system. So, as we do a better job of controlling the system and controlling what the dealer can sell, we won't be left open to an individual dealer making a promise. Can it happen? Absolutely.

And oftentimes, do we try to support our dealer? Absolutely. But our job is to continue and we've done a pretty good job of that. You know, they're not out there doing plain sheets of paper, but we just have further - we need to do a better job of it.

Is there a commission based upon the profit of the delivery or the gross?

It's not a commission. We sell to our dealers and they resell.

Thank you.

Thank you. There appear to be no further questions at this time.

Oh, wait a minute. We have a follow-up from Walter Liptak from McDonald Investments.

Hi. Just - since we've got you, could you tell me what the cash out was, the exact amount, for the Leach acquisition and what you - and I guess for next quarter, the Wittke acquisition?

We have made an agreement not to give out the specificity on the amount of cash with respect to the Leach transaction and we need to honor that agreement with the seller.

OK. How about on the Wittke deal?

Now Wittke, the cash disbursed was $37 million.

OK. Thank you.

Thank you. There are no further questions at this time. I'd like to turn the program back to you.

OK. Well, thanks for joining us. We understand the challenges we have. We are comfortable with the progresses in three of our four groups. We are devoting substantial resources to the integration of these acquisitions and more substantial resources to addressing our operating issues at fire rescue. We anticipate to make improvement going forward and we will talk to you in January and report on that improvement. Thanks for being with us.

Thank you ladies and gentlemen for your participation in today's conference. This does conclude the program. You may now disconnect. Good day. 13

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