Federal Signal Corp (FSS) 2002 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to your Federal Signal Corporation Fourth Quarter Earnings Release. (Caller Instructions.) I would now like to introduce your speakers for today's conference, Mr. Joe Ross, Chairman, and Stephanie Kushner as Chief Financial Officer.

Good morning and welcome. As is traditional on this type of all, I'll start by reminding you that some of our comments will contain forward-looking statements about the future prospects of Federal Signal. Please refer to our latest Annual Report to shareholders, our recent SEC filings and our press release issued in conjunction with this conference call for more detailed discussions of risks involved in our forward-looking statements.

First, I'll just briefly review the highlights for the fourth quarter. Our diluted earnings per share from continuing operations totaled $0.28, up 33 percent from $0.21 in 2001. This brings our full year results to $1.01 per share, slightly below the prior year's $1.03. As you may recall, in 2001 we incurred a restructuring charge of $.05 per share when we reduced head count across all operating groups. Last years results also included $0.12 for goodwill amortization, $.03 per quarter.

At our last quarterly conference call we had indicated an expected earnings range of $0.30 to $0.38 per share. We came in below this range almost solely due to weaker results from Fire Rescue group, which continued to struggle with increasing production and managing costs in our U.S. units.

Our new order activity was mixed. We booked $286 million in orders, about the same as for the same quarter in 2001, and just 2% less than our sales value. Our total backlog declined, slightly, from last quarter to $422 million, still a record for year-end and up 20% from the end of 2001.

Our December 31 backlog by key business is as follows: For EPG, Environmental Products group, $84 million, for Fire Rescue group, $282 million, for Safety Products group, $44 million and for Tool group, $11 million. They're all up except for Tool, and Tool doesn't tend to work with a backlog because of their short order cycle.

Sales totaled $292 million, up 7% in the fourth quarter of 2001 due to the inclusion of the Refuse acquisition and stronger results for Safety Products. Fourth quarter sales outside of the U.S. were strong, up 7% from last year, excluding the benefits of currency translation. We had strong sales for European police products and for tooling in Europe and Asia.

In my discussion of group results, all of the comparisons are consistent with respect to accounting treatment for goodwill. That is, we've adjusted the 2001 baseline to take out the goodwill amortization. On an accounting neutral basis then, our gross profit margin for the quarter was 27.5%, up slightly from 27.2% last year, with improvements across all businesses except Fire Rescue.

Our operating income of $21.3 million or 7.3% of sales. This margin is about flat for last year's number for the quarter.

By group for the quarter, Environmental Products new business was up 48%, including the impact of our acquisitions and then other factors that we mentioned in this press release, and which Joe will talk about some more.

Our operating margin was 5.2%, slightly below the 6% range we had indicated. Fire Rescue's orders were about 30% lower than last year. Sales of $97 million were 6% below prior year. Our operating margin was 3% versus 6.6% last year. We had forecast about $100 million of sales and an operating margin of at least 5%. So, clearly, this business, again, fell short.

Safety Products group orders rose 10%, especially for European police products and airport parking systems. As we had indicated last quarter, sales rose more significantly, 17%, due to deliveries against a large Spanish police vehicle conversion order and stronger parking and revenue control business. The operating margin was 17.7%, in the middle of the predicted range.

Tool was about as planned. Sales were up 3% versus the prior year and the operating margin averaged just over 11%, in line with guidance. This is significantly higher than last year's 7% margin, which included restructuring costs.

Below the operating line, interest expense was $5.5 million, just slightly below last year. The benefit of lower interest rates was offset by increased borrowing to fund the refuse truck body acquisition and higher rates on some of the debt we acquired, most of which we have since retired.

Our effective tax rate remained low in the quarter, 21%, due to the mix of earnings including our relatively higher international and tax-free municipal income and the close out of the tax advantaged financing instrument.

Our operating cash flow, before capital spending and dividends, remained high this year, at $88 million. During the last conference call, we projected that we would exceed $90 million, however, we elected to make a discretionary $5 million contribution to improve the funding in our pension fund. We did that at the very end of the year.

Working Capital and Other was a $23 million source of cash this year, including higher customer advance payments. Our full year capital spending was $20 million, about 7% below our depreciation level of 21.7 million. And at year-end, our debt to capitalization was 44%, unchanged from last year.

Let me talk about 2003 earnings guidance. First, for the full year, as we mentioned in the press release, we're looking for 2003 EPS of $1.05 to $1.15 per share, but are cautious about the economy. The underlying assumptions are based on a 15 to 20% increase in sales, and I'll talk bout the individual groups.

At EPG, our revenues are expected to rise 18 to 25% with an operating margin somewhat lower, in the 5-1/2 to 6-1/2% range because of the mix of businesses.

Fire Rescue sales should be 20 to 30% above 2002, starting the year as we always have such a strong backlog. Margins should improve to the 5 to 7% range.

Safety Product sales should rise 10 to 12%. They have that new airport parking contract and their stronger position in the European police products business. The margin will be about the same as last year, in view of their higher pension expense and the one-time cost of a plant shut down in the first half of the year.

Tool revenues, absent any real economic recovery should rise 2 to 4% and should achieve an operating margin about 1% above last years result, or about 13%.

Corporate expense should be in the range of $13.5 million. Interest expense will be about the same as in 2002, in a range of $20 million, depending on what happens with short-term rates. We expect our tax rate to return to about 28% in 2003. It could be slightly lower if we're on the low end of our earnings range. Our share count should average about $47.7 million for 2003.

Regarding cash flow, we're forecasting a number in the range of $90 million again next year, including further reductions in working capital of $20 million or more, and capital spending about equal to depreciation in the 22 to $24 million range, although that's higher than 2002 because we're adding the Refuse Operating units.

Looking at the first quarter alone, our first quarter earnings we're expecting to be unusually low due to some one-time costs and an initially weak order book for sweepers in the U.S. We're projecting EPS in the range of $0.12 to $0.16.

And I'll cover the short-term outlook for each group. Environmental Products is projecting about a 10% increase in sales due to the addition of the refuse businesses, but this is somewhat offset by low sales of U.S. sweepers and sewer cleaners. The sweeper reduction relates to a low order rate at the end of 2002, but the sewer cleaner weakness is more timing of shipments.

Operating margins will decline to the 3 to 4% range reflecting these reduced sweeper sales and also some one-time costs in our European sweeper business associated with their launch of a new products group to meet new E.U. standards.

FRG, Fire Rescue should see some sequential improvement in sales. Sales of about 100 million or slightly more for this segment for the quarter. Operating margins in this first quarter are traditionally lower due to seasonally lower sales of our higher margin aerial equipment. However, we expect some slight improvement in margins, both sequentially and versus the prior year, in the 3 to 4% range - with margins in the 3 to 4% range.

Safety Products should see a 7 to 10% increase in sales due to growth in our parking control systems business and our safety storage containers. We also expect stronger performance for our European businesses.

Margins will be softer than last year, in the 11 to 13% range due to one-time expenses beginning the first quarter, associated with shutting down a U.K. production unit and increased pension costs in the U.S., which affects this business more than others.

The Tool Group will be about the same as last year in terms of sales - sales up maybe 3 to 4% at slightly higher margins, about 11%. Their margin in the quarter is less than we're expecting for the full year because they, too, are shutting down a facility. This one in upstate New York and will incur some costs, primarily in the first half.

Corporate expenses will be up slightly from prior year, to about $3.5 million and quarterly interest expense should continue in the $5 million range. Our tax rate should be in the range of 28%.

I'll turn it over to Joe.

Thanks Stephanie. Good morning. As I usually do, I'll make some broad comments about our general markets and some general operational comments and then proceed on to each of our four groups.

Not a lot of change since our last conference call. Our governmental markets, which represent about 60% of our sales, remained mixed with continuing weakening in the U.S in certain of those markets, which we also discussed in October. The reduced spending at both the state and local levels continues to impact us. As most of you know, local spending is more relevant to us than state. Both have some impact, but the local municipalities are more important to us as customers - not more important, but larger.

Due to the overall priority that most of our products have in the normal government budget, we do not anticipate that this overall fall-off in demand for our products will be as great as the overall fall-off in governmental spending. Again, we think we have a fair priority in those budgets.

While I'll speak to each group a little later, I would briefly state that we continue to see good demand for our Fire Service product offerings, our revenue control offerings in the U.S. airport market and our outdoor warning product offering.

The approximate 40% of our sales destined for the industrial commercial segment remains very slow. While we did see certain of our industrial commercial product lines had some increase in the fourth quarter, as we mentioned in our press release, we haven't seen anything that is a sustainable increase in our market places.

Again, our broad industrial commercial markets are best described as essentially flat to 2001. From an operating viewpoint, I mentioned in our last call, that we would be reviewing the full year results of our lean initiatives on this conference call. I thought I would do that by giving you a summary of some of the metrics by which we measure our progress in driving lean enterprise throughout our corporation.

From a procedural standpoint, all of our 24 operating units have had training and developed implementation plans for lean. From a manufacturing perspective, initial actions have been taken in 60% of the manufacturing cells within our various facilities. And by the end of '03, we expect that to be about 90% complete with initial action in each of our manufacturing cells.

During the past year, two-thirds of our businesses saw significant improvement in inventory turns. For those achieving improvements, the average improvement was more than one turn. Notwithstanding the through-put issues we occurred at our U.S. Fire Rescue businesses, which resulted in temporary increases of their work in process, the total corporation ended the year with turns around 4.7. We are planning on additional improvements in turns in 2003.

During this past year and including actions to be taken shortly this year, which I'll be explaining, our lead initiatives will be driving an approximate 8% reduction in our manufacturing floor space, or, roughly, 290,000 square feet. We closed two small facilities this past year and we'll be closing two more facilities this year, as well as consolidating one or two more.

We have also seen significant reduction in lead times for various of our products throughout the organization. For some of our larger product lines in the vehicle-related businesses, we have seen some lead time reductions in the area of 25%. While for some of our smaller product lines, we have seen reductions from two to three weeks, to two to three days.

There are other lean metrics, which we follow internally, such as quality, productivity, etcetera, but I believe the above gives a fairly good indication of the results we are seeing to date with our lean initiatives.

As I believe most of you know, Andy Graves, who joined us as our president two years ago, left the company at the end of last month - or actually at the end of this month, he will be leaving. Andy had been brought aboard to focus on operational improvements for us, and also as part of our succession planning at Federal Signal.

With respect to the succession planning aspect, Andy was ready to be a Chief Executive Officer and that was the roll he was looking for, and especially in view of our operating results at the Fire Rescue group this past year, we are not yet prepared to move Andy into that roll. Andy chose to leave as he is interested, and I knew at the time we hired him, in being a - having a CEO roll at this point in his career. We will be filling Andy's position this year.

With respect to the operational improvements that Andy brought to the company, our lean initiatives, as well as our increased focus on corporate-wide purchasing were the two main programs that Andy championed. I can tell you that over Andy's two-year time period, both of these programs have, for the most part, become cultural within Federal Signal and I do not see us losing any momentum within these programs going forward. We still have progress to make on both of those fronts and I believe our company is well positioned to do that.

A quick comment on our Sign group before I move on to our continuing operations. We have been in negotiations with a perspective buyer and that buyer is presently in the final phase of due diligence. If the final due diligence is successful, we anticipate selling our Sign business near the end of the first quarter.

Moving to the groups, I'll start with our Tool Group. As you know, this business is 100% industrial, with about 75% in the U.S. and 25% spread around the world, mostly in Canada and Europe. To repeat what most of you already know, we serve a wide variety of market segments in the U.S., but the largest, or approximately 30% is auto manufacturing. While the sustained U.S. auto production has helped us over the last two years, a lack of capital spending by the auto manufacturers, as well as by our broad base of customers, has caused broader demand to remain slow.

We have done a fair amount of cost reduction during 2002, which should benefit us this coming year. Further, we just announced the closing of a manufacturing facility in upstate New York and the work from that facility will be consolidated into our existing manufacturing operations.

While slow markets had some impact on this decision, our efforts at leaning clearly facilitated our ability to close this operation and move the work into our existing facilities. We will incur about 1-1/2 cents in cost in the first two quarters, but we should recoup most of that over the balance of the year. More importantly, we will have a positive cash benefit this year.

Within our Safety Products group, most of our governmental business showed some order increase in the fourth quarter, but we, essentially, see this market segment in total, to be flat. While we do see municipal budget impacts in this group since the product offering is generally safety related, we should not be negatively impacted as much, for example, as the municipal offerings in our Environmental Products group.

We also just announced the closing of one of our small manufacturing facilities in this group, which is located in England. That production will move to our Illinois manufacturing facility. Again, this was made possible by our lean initiatives. We will incur costs of about $.03 to $.04 in the first half of this year but a good portion of this will be recovered during the balance of the year. On a cash basis, it will be roughly neutral this year, but provide net benefits thereafter.

As I just mentioned, the slowing municipal markets are having the greatest impact on our Environmental Products group. The U.S. market for street sweepers has slowed down significantly. And this was especially noticeable in the fourth quarter. I think the significant slowness with our higher margin sweeper products is what's impacting the overall group's margin that Stephanie provided guidance for in 2003. Our sweepers, generally, are a high-margin portion of our business, and as they get impacted more than other pieces of this group, it will impact our overall margins.

Demand for sewer cleaning trucks has been slow all year, but we are not seeing any additional slowing in this market segment. As we mentioned in the press release, the group in total had new orders that were up substantially on a quarter-over-quarter basis, but this was due mainly, almost exclusively, to the inclusion of our two refuse truck body acquisitions in the fourth quarter of last year.

The integration of those two acquisitions, Wittke in Canada and Leach in Wisconsin is going well and we have multiple teams working on the integration process. At the same time, the refuse body market has been slowing throughout the past year and remains very slow. The acquisitions had no material impact on earnings in the fourth quarter and if the market remains as slow as it currently is, we'll have only marginal impact on earnings in 2003.

Notwithstanding the current market environment, we remain very confident that these acquisitions not only fit well within our Environmental Products group but will deliver long-term value to the company.

The group I'd like to spend a little more time on is the Fire Rescue group, since we are, again, disappointed by their performance this past quarter. First of all, from a market perspective, you'll note that we reported orders down significantly from last year's fourth quarter.

However, as we have said many times, we don't believe one quarter's comparisons are necessarily an indicator of the market place. For example, as we explained last year at this time, we had an unusually large fourth quarter for orders in 2001 and didn't feel that that was a market trend, rather an unusual grouping of orders.

Three months ago on our conference call we talked about the unusually large third quarter we had this year and that many orders bunched in the third quarter that effectively pulled forward from the fourth.

That being said, however, we did see perspective orders, some of them, being pushed into the first quarter of this year from last years fourth quarter. At this particular point, we don't believe we are seeing a market slowdown, as we are working on a very high number of bids, as we speak.

However, we do note, we did mention a note of caution in our press release, since we feel that if these delayed orders from Q4 do not close substantially within this quarter, it may well be an indication of a slowing market. We had a good January in the orders and we have not seen any cancellations of the bid processes that were deferred from the fourth quarter.

Moving to operations, clearly, we were disappointed. We explained in our last conference call, the issues that we encountered within our U.S. production operations as a result of having more complex vehicles than we had planned for, as well as having more prototypes going through our system at one time than we could efficiently manage. As I indicated last time, we should have managed that better and, in fact, anticipated more improvement in the fourth quarter than we realized.

I would mention that in the fourth quarter, our productivity in our U.S. based operations, specifically in Florida, did increase. We increased our number of hours worked. We did shift more complex trucks in the fourth quarter than we did in the third.

And our head count, where we have also mentioned that we are needing to increase our total employment, we did increase it. We ended the year, to give an example, we have about 845 average head count in the third quarter, direct labor, and by the end of the fourth quarter that was at 894, averaging 873 during the fourth quarter.

I think the messages are we have been able to ramp up the employment. Obviously we have some labor - we increased our productivity notwithstanding having a large number of new employees coming aboard in the fourth quarter.

From our discussion three months ago and our projection for fourth quarter sales, we have seen in excess of $9 million in deliveries move into the first quarter. Of that number, most have already been delivered and the balance should ship this quarter. We have made additional operational changes in our U.S.-based facilities and we are aggressively perusing the changes necessary in order to insure that we can return to more profitable operating levels.

As you saw from the guidance that Stephanie provided, we will still be wrestling with a great deal of those problems in the first quarter, but we see much better improvement in operating margins beginning in the second quarter, as some of the backlog of more difficult trucks and prototype trucks ship in the first quarter of this year. We will still have some of those in the second quarter, but the number will be down from the first quarter. I don't have exact numbers on those, but I know that it's trending down.

With respect to the coming year, we anticipate substantial improvement in the groups' operating margin compared to 2002. This improvement will be driven by a combination of better pricing, benefits from increasing our focus on our lean initiatives within our U.S. facilities, as well as better operational execution throughout the group.

With respect to 2003 overall, we have provided guidance and specifically noted that we will be updating that guidance at our next conference call. At this point in time, with the exception of a few of our businesses, like Fire Rescue and Parking Systems for airports, we do not have backlogs that are sufficiently large to offset any further weakness in either our commercial industrial customer set nor our municipal customer set.

Not unlike most other reporting companies, we feel the movement of the U.S. economy through the balance of the year can have a significant impact on us, both positively and negatively. Accordingly, we have taken a cautious approach with our outlook.

That's it for our prepared comments. I'll turn it back to Melina for questions.

Thank you sir. Ladies and gentlemen, if you have a question at this time, please press the 1 key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question comes from Jack Kelly from Goldman Sachs.

Hi Joe. Two questions, one on Fire Rescue and then one on the balance sheet. In terms of the margin up tick kind of forecast for the second quarter, it seems that some of it, Joe, is that you're going to have gotten - have delivered some of the more complex trucks and that helps.

But I guess the real issue is, those orders might come back again at some point, do you feel you'll have resolved the issue of manufacturing those trucks, or don't you take orders again? What's the final resolution? Did you figure out how to make them at a profit - sufficient profit, or do you just, kind of, avoid those orders in the future?

And, I guess in conjunction with that, you know, in the past, you thought this group had the potential, Fire Rescue, to get to a double-digit margin. Do you still think that?

And then the second question is with regards to the finance company, in terms of receivables, they trailed off in the December quarter to, I guess, about 226 million down from 232 at the end of September. I was just - that's a net number, you know, net of doubtful accounts. I was just wondering did it trail off in receivables because you just had fewer leases or was there a bigger charge in terms of doubtful accounts in the fourth quarter?

Let me talk to the operational issue first. With respect to these [technical difficult] trucks, and we mentioned this in the last call also and I'll reconfirm it in this call, we did, in fact, change our processes in the third quarter as when we came across - when this problem really ballooned on us, and we changed our upfront processes with respect to bringing these complex order into our system.

Most of it was to work with customers to better define and better move them to options, which had less manufacturing complexity for us. Some of it was yes we are going to be more aggressive in rejecting one customer request that they're unwilling to pay for and which caused too much complexity in our system. That's probably the more minor piece of it.

The major piece is moving the customers to what we do best and manufacture best and still satisfying their need. So we did make an upfront change and that's the reason we feel confident. Will we ever get one again? I'm sure we will. Will it happen to the extent it did in '02? It should not with the front-end process already put in place.

You also - the margin point. A double-digit margin is still our strategic objective. Clearly we have not made the progress we intended to and '02 is a perfect example of that. We gave our guidance for '03 and it indicates we're not going to get there in '03. In great part we have - as we exit '03, if you just consider the first quarter margin in the guidance and the full year guidance, we should have a much better margin exiting '03. So the 10% is still in our sites and it is our strategic target.

Jack, on the leasing portfolio, the reduction that you see in our portfolio is not in our exempt or our municipal business. It's in our industrial business. And what's happened there is we made a strategic decision at the end of 2000 to exit that and run off that portfolio.

We've actually - we have a partner, a banking partner, who now provides financing as appropriate for our industrial customers. There are no issues on bad debts. The bad debt rate continues to run very low on the portfolio and, in fact, our charges for bad debts were the same in '02 as in '01. And also our past due percentage is down fairly materially.

Okay, good. Thanks. Joe, just one follow-up question on Fire, did you get any price increases on engines in Fire Rescue in the fourth quarter? And were you able to pass those through or is that part of the margin deterioration we saw in the fourth quarter?

No, we believe the - we checked this after we saw one of our competitors suggest that we didn't do that. And I have followed up to know that we have - every order that we have taken with a new engine has had prices increased to compensate for that new engine. So we did not get in the mold of taking orders and then eating the increased engine costs. That did not happen with us. We pass them through.

Good. Thank you.

Our next question comes from Scott [Krasik] from [E.L.Tap King].

Good morning, a question on the outdoor street sweepers. It doesn't appear from an outsider's point of view with very limited mechanical experience, that there are a lot of technological advances in street sweeping for the last few years. I was wondering if maybe that has led to the trend down in demand for your sweepers or if it's strictly an economic factor? Thanks.

It's interesting that you raised that because it's probably one of the product areas where we have the most [technical difficulty] mention briefly that one of the major ones we're working on - historically sweeping is done - street sweeping is done using water to hold down the dust and therefore it carries weight and other issues with the vehicle.

We have just introduced a waterless street sweeper and folks can sweep without having to carry water, which allows them to sweep in northern climates in the winter, etcetera. So that's a fairly significant technological advancement. The other ones we introduced over the last couple of years relate to the emission of particulates while sweeping, especially on the West coast. And we have done a substantial job of reducing those emissions with a great deal of technological effort.

So this is an area of our product lines. Environmental drivers are big, they're huge and we continue to put a lot of time and money into increasing and bettering that product line.

Now to the basis of your question. Clearly, economic. It is not a share issue. We are confident that our sweepers have a very large market share in the U.S. and confidant that we're not using that. This is not unlike the last two recessions that I've experienced here, in any event, that when the cities are doing their budget constraints, street sweeping and our products - you know, I think all of them have a degree of priority, street sweeping, invariably, gets hit greater than the others because folks are more willing to defer sweeping than they are police products, fire products, etcetera.

Okay, I guess, just to follow up to that, two questions. One, will the demand for street sweepers be there? Will they order them later? And then also in terms of the waterless sweepers, that is a pretty good advance. Have those hit the market yet and how have they been received?

They've been introduced at dealer shows and at customer shows. They go into production, I believe, in the next few months. They've been received positively. We think it's going to be very beneficial to us.

Overall demand, you know, you have the old term of deferred orders? There will be some that never come back because when they buy the new ones, if they defer the old ones six months, then they move their whole replacement cycle. But to your point, I think, we're not seeing anything that says there will be fundamental change in demand, other than this cyclical downturn in sweepers in the U.S., particularly.

Okay, thanks very much.

Our next question comes from Larry Baker from Legg Mason.

Good morning, Joe and Stephanie.

Good morning.

Stephanie, would you help me with the fire rescue sales forecast for the full year? I think it was -- I just missed the number.

Okay. Yeah. I said it would be up 20 to 30 percent.

Okay. Joe, just on that number, can you talk about the Fire Act and I guess in part the I guess lower than expected spending of the allocated amount in 2002 and sort of what that means for 2003?

Sure. Unfortunately, the answer I'm going to have to give you is we don't know what it means for '03 but I can tell you and no and for those who aren't familiar with that -- we're putting out about 360 million to the fire service for '02 based on the percentages they did in '01 along with their guidelines of 25 percent for fire equipment. The early anticipation is that we'd get somewhere around 90 million into fire equipment in '02 with about 90 percent granted at the end -- the calendar year 12/31. That turned out that it was running around 12 to 13 percent for fire equipment, which is the lower percent that I believe Larry's referring to. They just announced today that they made the rest of the grants but we don't have, as of this morning, a split on where that goes between apparatus and non-apparatus fire needs. With respect to what that means to '03, what we suggest that we no longer anticipate a 25 percent level '03 fire service spending to be on apparatus, just based on that history. I think the other piece is that there was -- and I don't believe this bill has been finalized yet for '03 FEMA grants. The amount they were talking about significantly higher so that even if we get a smaller percent, if it's of a higher total grant for apparatus, we'll still have a pretty positive input to the U.S. fire market. But hard to predict what the government will do there.

Because your forecast for '03, in terms of fire rescue sales, is at the mid-range puts you over 400 million in annual sales. Can you just talk about the -- if it's not the additional federal funding -- sort of where that strength is coming from when the rest of the municipal spending is looking very sketchy?

Correct. I guess the -- where we see it, we do our forecast based on -- I mentioned in our calls -- our bid activity. Our bid activity right now is very strong. The way we do our forecasting we go to our whole dealer organization -- there's about 46 of them -- and as you know, fire products -- there would be an indication if they're looking to buy something in the third quarter, they're talking about it now or the second quarter. It's a long sales cycle. And, again, I'm trying to answer your question of forecasting. We're not specifically forecasting anything -- just saying well the government is going to give x, therefore, we add x to our forecast. We just don't forecast that way. We try to do bottom's up, based on our dealer input, the bid activity and what we're getting from the different fire departments as to their prospective buys and that's the basis for our forecast and, as I say, we have a noted caution because had some delays -- fairly large amounts, which are moving in. But so far January is -- which also doesn't say much -- has a 30-day period, has been fairly good business and we're still working a lot of bids.

And just to follow up, you said that the -- this morning that the Fire Act released the remaining funding. But it's not clear yet whether it goes into fire trucks or apparatus.

It's not clear to us. We got a print-off about an hour before this just to get updated and all they said is that -- the print-off said is that the balance had been -- was being spread out and would be delivered to departments within two to three weeks or something like that and that's the only information we have. I don't know for a fact that there isn't something additional on there as we speak right now.

But that would indicate that the money -- sort of the '02 funding would actually be spread over '02 and '03.

Oh, I think that's a fair statement. As fire -- as orders or -- that we might receive, we -- it was never -- we would never have suggested that we would get the orders in the same year as the money.

Okay. Looking out for the -- when this program ends, does that mean that there's -- in '03 -- does that mean there's a sharp drop-off in '04 in your -- it would indicate that that would not be the case.

That would be the indication because their experience and I'm sure if they had allocate the money again in '03 it will mostly -- they spend the beginning of the year figuring out who to give it to so it would again be granted near the end of the year and therefore, the major benefit -- it would probably -- if history repeats itself, it starts in around August, so there's some benefit to Q4 of the year they grant and then there's also benefit to the following year.

Okay. And then a final, just a housekeeping question for Stephanie. The minority interest as a plus -- as an income item in the fourth quarter, can you talk about what that -- where that comes from and what that might be in '02 -- sorry, in '03?

Yeah. That's just -- there's more than housekeeping. It's an operational issue so I thought I'd take it rather than Stephanie, but -- we have a part ownership in a company we own in Plastisol that we've talked about, which makes composite in Holland. And just from a general accounting thing, and if you want more specific then Stephanie can get to you because I'm over my head there -- one line [indiscernible] because of the requirements we talk all of their income, we take it out in the other income line, accounting to the accounting rules. But it relates to this joint venture we have.

Okay. Thank you.

Our next question comes from LJR of Great Lakes.

Good morning. Elliott Schlang. Three quick questions, if I may. With the dividend payout now approaching roughly 80 percent, could you just comment on the Board's comfort level with that payout?

Sure. I'll start with our current payout -- we're very comfortable. As we indicated, we had a strong cash year in '02. We anticipate a strong cash year in '03. There has been no discussion and there's no management intention at the -- that we'd do anything negative to that dividend. We feel very comfortable with it.

Joe, secondly, with the number of restructurings over the years, could you give us some comment on your outlook for whether we should expect additional restructurings in the coming year?

I noticed that one thing we are not doing is we're not separating out in our earnings guidance -- these restructuring charges. What we try to do -- we're taking them and we're eating them as we go so that we're not trying to change our earnings or you won't see [indiscernible] earnings numbers from us. The only reason we discussed them today was so that folks can understand which things might be continuing and which things might be done.

To your question of whether we might have more, if our lean continues to do what we do -- if we can reduce these manufacturing -- and that's what these "restructurings" are referring to where we're having the ability to get out of some fixed cost and continues to do that for us, there may be more. Do I see any in our sights other than the ones I mentioned? No. Do I see any major ones where we're going wholesale -- close facilities? No. But there's -- maybe continuing some small ones. We do have small satellite facilities. I don't have any plan for that, but I just -- so that we don't end up tripping and answering your question, I wouldn't rule out that possibly as we reorganize and get better at our manufacturing.

And, lastly, given the arguably -- rather lackluster performance of some of the acquisitions, are you rethinking your acquisition strategy in order to prioritize internal improvement rather than making additional acquisitions and/or using those funds on share repurchase?

I think especially in the short-term and let's measure that by 2003, it's unlikely, unless it's put serendipity that something comes along that is critical to our strategy, but it's unlikely that we'll be spending much money on acquisitions -- we, for a couple of different reasons. We're in full consumption mode in environmental products. Our number one priority at fire rescue is get our operations in the U.S. significantly better than they are and we don't necessarily have a desire to increase the tool portion of overall Federal Signal. We may have a couple very small tuck-ins that could occur in our safety products crew. Short-term acquisitions are not a key issue at Federal Signal. Delivering and internal performance in growth is.

With respect to your broader question, we -- long term and refuse, we -- that market was going down and we saw it going down as we bought those businesses. That did, as we mentioned before, we think that impacted the price we paid as the market went down. It has stayed very slow -- short-term, it's definitely -- it's hurting us. Long-term, we think it makes sense to us and will add value to Federal Signal. Our general philosophy is we think internal growth has a better payoff than acquisition growth and that's what so -- [inaudible] prefer to grow internally and invest our money in our own resources to grow than to buy -- to go acquisitions, which is the reason over the years and we continue to say that Federal has no intention of getting on the acquisition wheel for the reasons you're talking about.

And repurchasing of your shares?

We have no near-term plan to repurchase shares. What we would like to do in the short term is reduce our debt.

Thank you.

Our next question comes from [Martin Jacobs] [ph] from Capital Research.

Good morning, Joe and Stephanie. I had a couple questions here. The first one is just -- Stephanie, could you repeat the outlook for the Safety Products Group?

For the year?

Right.

Yeah. We're looking at a ten to 12 percent increase in revenue, and margins, 14 to 15 percent.

Okay. And I was just wondering how that squares with Joe's comments about the fact that order rates were good in the fourth quarter, but perhaps they were looking flat for the rest of the year or maybe I didn't understand that correctly.

Let me just clarify. What I meant is while I wanted to report the fact that we saw some increase in orders in the fourth quarter, but we don't believe that's indicative of the full year. We think that those markets broadly and safety are still flat. We did have some Q4 uptick, but we didn't want anyone to -- we didn't want to suggest that we see strengthening in our municipal markets because we don't. That was the point.

In 2003 one of the big increases that we get is the Dallas/Ft. Worth order so that, in and of itself, is a fairly material year-over-year contribution on the top line.

To the point of the margins, also, do recall that that group has two things going on there. To Elliott's question, we do have some of the restructuring that we put right into that, but I think it's important to know that because one compares 2002 to 2003 margins and the question is are we improving operationally or aren't we? Also, this group happens to get most of our pension costs because this group has most of our employees and not all of our employees, by the way, are on a [indiscernible] benefit pension plan -- so when we talked about those earnings at the total corporate level, the majority of that is going down to safety products.

Okay. Alright. The second question I had was now with Andy gone, can you talk about or add a little bit more color to how the lean initiatives will continue to be spearheaded across the organization?

Certainly. When I made the comment about becoming cultural, that was intended to tell you, to tell everybody that this is not something that requires Andy or Joe Ross to be out there every day or every week requiring that our businesses change their thinking or do their next program etcetera, etcetera. But we have seen enough benefits, and I've mentioned some of them on this call, that locally our managers have taken up this spear themselves. I will say in the beginning some of them had to get hit pretty hard in order to change behavior. But that occurred and in most -- all cases, in other -- we have a few small units and that's why I keep hedging with most/all cases -- there've been enough results that the local teams have gotten the excitement. They've gotten the passion.

What we do now or I will continue doing on our regular monthly reviews, every company has to report on their lean initiatives. We have a scorecard that we've been taking to our Board the last year and a half. We'll continue doing that at each of our Board meetings -- presenting a lean scorecard. We're retaining our corporate focus. The point I'm making is throughout our organization they're seeing enough results that they're getting the excitement. They know we're not getting top line right now. Our managers are driven by profitability and they know this is a key piece of helping get some profitability while our markets are slow.

Okay. Thank you.

Our next question comes from Walt Liptak from McDonald Investments.

Good morning. Just a risk of having you repeat yourselves, the Fire Act -- are you seeing orders come in from the Fire Act?

We have seen some. I can't give you statistic on the number we've had, Walter, but we definitely -- I know we have. They tracked it and by the end of this program and make it -- I don't know if [indiscernible] by next conference call perhaps because there is that lag time that I alluded to in talking to Larry's question, but will, at least, we can give you an update on what orders we believe came in specifically as a result of Fire Act.

Okay. And the orders that you've received recently, can you kind of quantify the mix of custom versus commercial?

Highly custom. And let me make sure there's a distinction for those of you -- we're not talking overly custom. The issue we had in the last past year was taking extremely, highly customized products. I think what Walter is referring to is we have two broad classes of product -- a custom one, which we build from the ground up and a commercial one where we buy a commercial chasse, such as a freightliner and build a fire truck on it. Using that broad split, we're still seeing more heavily costom than commercial. But within that custom, we have certainly cut down on the -- what our local people refer to as ["bombettes"] [ph].

Okay. Alright. And then just as a final question. The Sign Group -- at this point, how much in capital do you have invested in that business?

Just over $10m.

As you know, we have substantially reduced the capital in that business over the last three years.

Okay. Thank you.

Our next question comes from [Greg Halter] [ph] from LJR Great Lakes.

Good morning, Joe and Stephanie. Couple questions for you. On your balance sheet, there's a line item called long-term liabilities -- 32,656, which was not there at year-end or I don't think in September. Can you describe what that is?

The main reason that line goes up is because of a pension charge or a pension liability that we had to recognize at year-end, which is linked to the fact that not unlike most or lots of U.S. companies, we're actually in a position where the funding of -- our pension funding is less than our wind-up liability, so that triggers an entry that is a charge to shareholders equity and it shows -- drives an increase on that long-term liability line. And that's about $20m pre-tax.

Okay.

One of the keys because that's a pretty complicated -- pension accounting, which is somewhat beyond me, but one important thing to keep in mind is we have had no cash requirement in '02. We don't anticipate a cash requirement in '03. Now we made a voluntary in '02 because of the strength of our cash and I don't know what we might do at the end of '03 from a voluntary basis, but the status of our funding has not put us in a position where we have to put -- required to put any cash in and even voluntarily we'd be putting in minor amounts, if any.

Okay. And in the environmental products, do you have what the orders were, excluding the refuse?

No, we don't do that. And I will tell you that now that we've put these businesses altogether in one recording unit we'll be talking to trend lines, but we're -- as you know with our other lines, we don't split out or orders by specific product line.

Okay. Let me put it this way or phrase it this way, relative to the entire business, do you compute any sort of internal growth sales -- your increase or decrease for the quarter year-over-year?

I'm not sure I understand that question. Can you try it a different way? I mean our local businesses manage their business by product line.

I'm just trying to get a handle on what internally sales grew or declined in the quarter year over year.

Okay.

For the corporation as a whole.

Corporation as a whole?

And maybe you can't do or don't look it at that way, which is fine, but.

We don't look at it that way.

Okay. Also back on the balance sheet, account receivable and inventories were up, I presume due to the two acquisitions. How much of the increase was due to acquisitions?

How much on the receivables? A little over $11m. Inventory's about $29m.

Okay. Great. Back to the income statement for the fourth quarter, other income expense was income of 642 this period versus expense of 540 last year -- about a $1.2m swing year-over-year.

Right.

If you could describe the components of that?

Yeah. I've got that here somewhere. Our other income goes up and down. It sort of vacillates around I would say a mean of zero, but in this quarter we had an insurance settlement and we also finalized -- we closed out the interest rates swap that had been giving us some earnings volatility and we had small gains on both of those. In 2001, we had a loss on a minority position in a joint venture.

Okay. And my last question is -- is the guidance that you provided, Stephanie, for the full year of $1.05 to $1.15 translates into actually four to 14 percent on the $1.01.

[inaudible]

I presume that $1.05 to $1.15 excludes the $0.05 in the [inaudible] pension costs?

That includes the negative impact of the pension cost.

Okay. Thank you.

(Caller Instructions.) Our next question comes from [Fred Spees] [ph] from [Spees Thorz and Capital] [ph].

Yes. I take it you can't adjust your forecast in the environmental for the backing out the acquisition?

That's correct.

Okay. And can you tell us the backlog? You didn't -- I don't think I got that somewhere.

Alright.

Our total backlog was $422m. Environmental was 84 million of that total.

Fire?

282. Safety, 44. And tool, 11.

And then, Joe, what kind of person are you looking for as you replace Andy. And then, also, speaking of cultures, the fire thing's been a multi-year issue. Is there something deeper in that are that you need to do as well?

Let's go back to fire. I'll start there first. I was thinking of answering your first question "Superman," but I won't. Looking at fire rescue, we have made and I made reference to this that we made additional operational changes recently down there. And this is only U.S. operations. That's important to say, too. We have Canadian and Finish operations and our Finish operations especially are doing excellent, including the product they bring into the U.S. It's really down from a factory floor -- not the floor. I misspoke there. I don't mean it's our direct labor folks there. We have a great core of direct labor people, which we're increasing. But it's our manufacturing management, which specifically has not gotten the job done and we've made additions to that management force down there and we've made some replacements. And we are accelerating looking at our different processes and everything from the time the bid comes in the door until it is delivered.

And those changes, were they recently or they go back six months or?

It started [indiscernible] part of them started when I was answering Jack Kelly's question that back in the third quarter, we started aggressively changing the front-end process because we had these trucks in there that we should have never taken. In that time period, and I think I mentioned in the last conference call, we've made a change in the operations management in our New York facility. And we have done some changing in our Ocala facility more recently than that. And recall, also, that our group president came board -- a new one -- in April 2002. He's involved very directly in making these changes and that's why with the combination of things going on there gives us the ability to say, once again, but with perhaps on a different basis, that we think we're in -- we're going to see the improvements and we're going to see them this year.

So the issues are, at the factory level, are both in California -- or in Florida and New York, correct?

That is correct.

Okay.

Now back to the person -- obviously, I'm looking for somebody similar to Andy. I'm looking for -- and we will be going outside to look -- we don't see an urgency. We haven't started anything as we speak. I will be getting -- and I already have been getting back more involved in the operations. But we will be moving forward and we're looking for a top-notch individual.

Thank you and good luck.

The thing in particular because it does relate to fire as well as all of Federal. We're strongly leaning towards finding a person with manufacturing experience in their background so that we have someone that can touch and feel it and insure the fact that the changes we're putting in work and that they continue.

And one more, are you gaining or losing market share in any of your divisions?

Wow. Let me start by saying substantively, the answer is no, and that's across them. Okay. Now, can it be a point or two in any one of them? That's possible. And, obviously, we look at it each way, but we see no, not one of our businesses has a substantial or key market share issue. We do know that we've gained share in three to five of them -- good gains. And then there's that rest of in the middle that can go back and forth a point or two at any given time.

Thank you.

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

Hey, good afternoon. Just off the bat, Joe, you mentioned you had some time -- some difficulties sort of quantifying what internal growth environmental, but maybe you can give us a sense for the guidance going forward, is there internal growth in there or is it more a function of what we're picking up from the acquisition?

I would say most of it for '03 is what we're picking up from the acquisition. As we've tried to indicate, within environmental products is our largest struggle with municipal markets. And the largest piece of that business is street sweepers and sort cleaners. We are anticipating down markets in those product lines in '03 and the gains we're talking about will be made up by refuse.

Okay. Can you give us an idea or sense of the margins in the refuse business?

Well, we really -- we blend them all together. I think what we suggested at the time of acquisition is that they're similar to the rest of our group -- over time -- they could exceed the rest of the group. I doubt that that will happen during our -- the current demand cycle. But over time they could get better.

Okay. And then -- ?

One other thing I'd like to mention because it's important why we don't separate -- can't separate them out, we have -- remember this is a very integrated acquisition. It's not like they're stand alone companies. We have integrated sales and marketing. We've integrated engineering. We're talking those products through our dealer organization as well as direct sales. There's a lot of cost that's going to be blurred now. We can get into product cost -- by product, but there's a lot of the SG&A that's spread now.

Okay. [indiscernible]. And as for fire rescue group, I think it's in the 20 to 30 percent forecast gets you probably a minimum of about $100m a quarter run rate, if we assume that it were spread out like that. Is that how we should be looking at things and are you pretty confident that things are sort of up to par to do that?

I think that's a fair statement. I will tell you that with respect -- if we find out, if this market starts turning south, and as I tell you, we do not have that indication at the moment, we are -- it could have fourth quarter impact on us. Now, would it be -- that the market -- I can't imagine it falling off 20 percent, but I just want to let you know that our production schedule, while some plants and some product lines are filled throughout the year, definitely have openings in Q4 for some of our product lines so that even if it's a slight tweak, it's not -- it should not impact our forecast. If it's something dramatic, it could well impact us, but probably not until Q4.

Okay. Alright. That's fair. And just lastly on the pension end, you said that the expectation now is for that to hit you about a nickel for '03. Is my memory correct that it hit you, [indiscernible] not as a swing, but about a penny for '02? Was that about right?

'02 year-over-year.

Year-over-year we had a swing also, right?

Yeah, year-over-year is about $0.04. The absolute cost in '02 is, I think, $2.5m.

Okay. Got it. Okay. Perfect. Thanks a lot.

Our next question comes from [David Gurro] [ph] from [Tiro] [ph] [indiscernible].

Hi. Just a couple quick questions. On the street sweeper business being down, I think on the domestic side it'd be down 32 percent of the quarter. Stephanie, you talked a little bit about more of a timing of orders or timing of shipments as opposed to any -- not it's weak, but can you talk a little bit -- what -- is it going to get significantly better the second half? I mean is it [indiscernible] ask you to make deliveries in the second half of the year. I guess why is that street sweeper business going to get better in the second half of the year?

There was a little bit of confusion in there. The comments Stephanie made about delayed deliveries was -- I mean the timing of deliveries was referring to our municipal sort cleaning business.

Okay.

That was that comment. Separately, street sweepers -- a couple things happen that fourth quarter, which is traditionally our lowest quarter, because you have the northern U.S. not doing a lot of buying of sweepers until our advanced waterless one kicks in bigger. We have that degree, that bit of seasonality, which always impacts our first quarter. It clearly was much more dramatic in the falloff in fourth quarter orders than we have usually seen. When we look forward to the rest of the year and why Qs two through four should be better than one because already we've seen, as we watched the ordering pace and what's going on with sweepers themselves that they will not stay at that unusually low fourth quarter. We're not suggesting that market's growing. We still anticipate and have forecasted an overall down market for '03. But it will be much better than Q1 because of the unusual Q4 order pattern.

Okay. That did make sense. Stephanie, if you could also maybe follow-up on another question. On the safety products being up sort of ten to 12 percent in '03, is the right way to think about it is if we sort of take out the Dallas/Ft. Worth incremental revenue in '03 versus '02 that -- maybe to Joe's comment that that's basically a flat market excluding that? Is that sort of the [indiscernible] to get you to that 10 to 12 percent almost exclusively?

Well, the Dallas, Ft. Forth is about $20m and we're looking for an increase that's maybe 30 or a little over.

Okay. That's --?

Start getting some growth. We've definitely have picked up some share in our European police products. That business is growing nicely and our warnings systems is staying very strong.

I apologize. Is the Dallas, Ft. Worth $20m incremental or is it $20m in absolute sales in '03?

Sorry.

I'm sorry.

I've just been corrected. We actually had -- because we're doing it on a percent completion, we actually recorded about $6m in '02 and we will do an incremental 13 in '03.

Okay. Incremental in '03?

It's a smaller percent than what I gave you.

That is fine. You are -- ?

[inaudible] the other business is more.

Okay. That is fine. Just on the dividend question and the cash is, obviously, is very strong. How bad with either fire or the rest of the business have to get before, Joe, you would consider or have to consider modest dividend cuts, given the payout [indiscernible]. How bad would things have to get before you would feel like we would need to talk about that?

Pretty bad because as we -- we're trying to even to be conservative in our forecast and still see a lot of cash generation. And I focus perhaps more so on cash for dividends than we do earnings. Cash -- and even let's talk the near-term, which I assume you're referring to, because I don't know what will happen in five years. But in the near-term, even the opportunities we have between the lines, and take fire rescue in particular, their challenges in '02 went broadly also to their ability to reduce their working capital as a percent of sales because of the work in process issues that they had. We see opportunities there, which we are focused heavily on as we speak, that are going to generate cash. Those aren't dependent on an external market or -- clearly, they require execution but -- I just don't see a scenario that would have us reducing our dividend. Now, you said how bad does it have to get? I don't know what -- I can't imagine it happening, but I don't -- pick a number if our cash flow went down to $50m --.

But the key is -- is the cash flow a number as opposed to -- in a situation where fire did not get better throughout the year -- in a situation where even with the war with Iraq -- street sweepers seems really depressed -- that even if we -- the dividend got to [indiscernible] net income -- as long as you're taking money out of working capital, as long as the cash flow is there. That would not alone cause you to really consider taking the dividend down.

Our main focus is cash generation.

Good. Okay. Thank you very much.

Mr. Ross, I'm showing no further questions at this time. Please go ahead with any further remarks.

Thank you very much. We know that we didn't deliver last year. We have made a variety of changes that we've alluded to. We plan on doing it differently this year and we look forward to talking to you in three months and talking about some of our progress. Thanks for joining us.

Ladies and gentlemen, than you for your participation in today's conference call. This does conclude the program and you may now disconnect.