Federal Signal Corp (FSS) 2003 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Federal Signal Corporation's first 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. 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. Please go ahead.

Good morning and welcome. I'm here with Joe Ross, our Chief Executive Officer.

As is traditional in this type of call, I'll start by reminding you that some of our comments contain forward-looking statements about the future prospects of Federal Signal. Please return to-- please refer to our latest annual report, our recent SEC filings and the press release we issued in conjunction with this conference call for a more detailed discussion of risks involved in our forward-looking statements.

For the first quarter we reported diluted earnings per share from continuing operations of 14 cents on sales of $292m. Our sales were essentially as forecast.

We experienced a little bit of disruption related to the war -- some Middle East shipments that were not made and a slight pause in industrial orders leading up to the start of the war, but these factors were offset by modestly stronger performance of our tool group.

The 14 cents we're reporting compares with 22 cents last year before the impact of accounting changes. As you may recall, last year we had an 18 cent charge in our first quarter due to the goodwill write-off associated with a niche tool business and that was necessitated by adoption of the new accounting standard.

Regarding earnings for this quarter, we had provided a 12 to 16 cent guidance range. We benefited in the quarter from the timing on a tax deduction associated with a plant shutdown. That deduction benefited us 3-1/2 cents in the quarter against a full-year tax rate we're now expecting of 26%. Partly offsetting this tax benefit were higher-than-plan restructuring costs. Given the current prognosis for a weaker U.S. economy than we were considering in January, we have taken some additional restructuring steps and incurred more costs. Rather than the 1-1/2 cent impact we had been forecasting in the first quarter, we incurred about 3 cents.

So in terms of our guidance, we had a 3-1/2 cent tax benefit offset by about a cent and a half of increased restructuring costs. Aside from this net benefit of 2 cents we would have been at the bottom end of our 12 to 16 cent range.

As you know, we don't report pro forma results excluding these charges, but just to be clear, they did impact the margins adversely for our safety, tool and environmental products businesses and I'll talk about that a little bit as I go forward.

Our new orders were relatively strong. We booked $284m in the quarter, up 13% from last year, mainly due to the impact of the refuse business acquisitions and also the weaker dollar. Our total backlog at the end of the quarter was $416m. This represents about a 1% decline from $422m at the end of the year, but it's 18% above this time last year.

In terms of backlog by group, our environmental products backlog at the end of the quarter was $94m, up about 12% from year end. Our fire rescue backlog at quarter end was $267m, down about 5% from year end. Safety products and tool were flat from year end -- safety products at $44m and tool of $11m.

As I said, sales of $292m were at forecast and about 19% above prior year. The increase reflects the addition of refuse, the expected ramp-up of fire rescue production, the benefit of the weaker dollar, which are all offset slightly by weak sweeper sales. Just in terms of our U.S. versus international sales, our U.S. sales rose 14% versus this time last year, but our non-U.S. sales were actually up 32%.

Our gross profit margin for the quarter was 25.5%, down 3 percentage points from last year due to a relatively higher mix of fire rescue sales and lower margins on refuse truck sales, as well as some other mix issues.

Our operating income was $11.2m or 3.8% of sales, down from $18.6m in the prior year. Excluding restructuring and other one-time costs incurred in the quarter, operating income was $13.4m or 4.6% of sales.

By group for the quarter, environmental products revenue was up 13% due to the addition of refuse revenues, which more than offset a weak shipments month for our sweeper business. Our operating margin was 2%. This was below the 3% to 4% figure we had indicated, which hadn't appropriately taken into consideration the timing on a planned price increase or the full impact of unfavorable mix effects. As you'll see from our forecast, we think this low margin is timing, primarily.

Fire rescue revenue rose to $99m, about as planned. Margins remained low at 2.2% versus our guidance of 3% to 4%. The shortfall was primarily overseas and Joe will talk about this in a little more detail.

Safety products revenue was a little weaker than we'd expected, up about 4% from last year. The benefit of the additional revenue from the Dallas-Fort Worth parking contract and continued strength in our European police products business more than offset weaker U.S. municipal sales for police products and warning systems. The margin was 9.7%, below the range indicated because of the mix of orders and somewhat higher charges for shutdowns associated with a U.K. operation.

Our tool revenue was up about 6% from last year, our best quarter since the second quarter of 2001. Operating income was $4.5m, 12% above 2002, despite including the closure costs of the New York facility and some inefficiencies associated with the startup of the plant in Portugal.

Below the operating line, interest expense was $4.9m, about the same as last year. You may have seen our recent press release indicating that Standard & Poor's had completed their evaluation and taken us off credit watch but reduced our short-term credit rating to A3. Fitch continues to rate us as an F2 credit.

The impact of the Standard & Poor's change is that we have replaced-- we have largely replaced our short-term commercial paper borrowing, which totaled $139m at the end of the quarter, with bank debt, which is slightly more expensive. We expect to incur additional borrowing costs this year, equivalent to about 2 cents per share as a result of this change.

The effective tax rate was very low, as I said, about 2%. We took a deduction against U.S. taxes for the closure of the U.K.-based business. Since the closure took place in the first quarter, accounting requirements necessitated taking the full benefit in the quarter, which benefited earnings by about 3-1/2 cents versus our full-year tax.

Operating cash flow was $18m in the quarter, down from last year, which benefited from a big reduction in receivables, but in line with our expectations. Our days sales outstanding rose to 52 days in the quarter. We believe this is the impact of sales mix, including higher international sales, rather than reflecting any increase in past-due amounts. Versus the end of year, for example, our amounts past due over 90 days actually declined by about 2 percentage points. Our inventory turns averaged 4.7 for the quarter. At this time last year we were at 4.2, so that's an encouraging fact.

Capital spending was at $4.5m for the quarter. We're still forecasting $22m to $24m for the year and it is typical that we start off a little slower in the first quarter.

Regarding our second quarter outlook, we're projecting revenues in excess of $300m in the second quarter, with a recovery in our total operating margin to the 6% to 7% level. Our margin will still be impacted by restructuring charges in the second quarter -- somewhere between 3 and 4 cents a share in total, although some of our actions in the first quarter will begin generating benefits.

By group, environmental products revenues should be up between 18% and 24% from the prior year, with operating margins recovering to 5% to 6%. Fire rescue revenues will be up significantly, about $105m to $115m and the operating margin should increase to the 3-1/2% to 4-1/2% range. Safety products group revenues will be up 8% to 12% from last year, with margins returning to the 12% to 13% range. Tool revenues will be flat to down slightly from the prior year and margins should approximate last year's 12% level. Interest expense should be slightly higher, about $5.5m, and the effective tax rate should be closer to the 28% to 30% range.

In total, then, we see EPS for the second quarter in the range of 17 to 22 cents.

Now I'll turn it over to Joe.

Good morning. I will start with a few overall comments and then address each of our groups individually. From an overall market viewpoint, our U.S. industrial commercial markets remain very slow. We have had some smaller industrial markets improve lately, such as our industrial vacuum trucks and water blasting equipment within our environmental products group, but we have also had certain segments get slower, such as U.S. demand for auto-related tooling products within our tool group.

Our U.S. municipal markets, which as you may recall began slowing down last year, remain slow as we continue to see a fair amount of deferred buying. Outside the U.S., we are seeing a fairly good Canadian market and we continue to gain strength in Europe, mainly in our fire and police products and mainly market share rather than market growth.

We continue to make progress on our lean initiatives as we have seen some additional reduction in product lead times in the first quarter. Our overall sales per employee increased 8% over last year's first quarter and, as Stephanie mentioned on inventory turns, we ended the quarter at an average inventory turn of 4.7 compared to a 4.3 average last year. So we are seeing continuing improvement there.

We indicated in our last call that we were in due diligence with a prospective buyer of our sign group. That process has gone well and we anticipate a sale of that business to occur soon. There will be no material impact of that sale on our results.

We are in the process of searching for a successor to Andy Graves, who, as you know, left us last quarter and we are hopeful of having that person in place early next quarter.

One thing I'd like to address -- we continue to get questions about our dividend and I'd like to address that again, even though we addressed it in the last conference call. As you know, our target dividend payout ratio is 35% of earnings. That's about-- that's somewhat less than half the current level of payout.

However, we have been maintaining that 80 cent payout for three key reasons: first and foremost, our strong cash flow; second, the expectation of an improvement in the economy and our business performance, which will allow us to approach our payout ratio; and third, the fact that we have no near-term strategic investment needs for this cash as we have described to all that our groups are focusing on internal improvement at this time and we have consumption in the environmental products group of our refuse acquisitions and we have our operating performances to improve in our fire rescue group. Again, we monitor these factors on a regular basis and quarterly review them with our board. As a corporation, we are committed to paying dividends and, in fact, just announced a dividend payment last week.

And now I'd like to make a few comments on each of our groups. While we would like to suggest that our tool group's increase in sales and income over last year's first quarter was the result of broad market strength, that is, unfortunately, not the case. We had some strong international business in the first quarter, which helped our results, but even that we do not anticipate that level of international demand to be continuing. Most of our markets remain very flat, with the exception of our auto markets in the U.S., which weakened in the first quarter and are likely to continue weakening in the second quarter based on the reduced production rates announced by certain of the U.S. auto companies.

Overall, our short lead-time tool business remains very vulnerable to short-term manufacturing vectors, both positive and negative.

Moving to our fire rescue group, overall new orders were up about 8% over last year's first quarter and, once again, that order rate was not even across all of our segments. For example, our North American municipal market orders were up strongly from last year's first quarter, but we believe this is short-term timing of orders, some of which may have been deferred -- in fact, we know were deferred -- from the fourth quarter. So we still expect the North American municipal market place to be somewhat flat for the whole year.

Outside of North America, we saw strength in orders for our aerial platforms, manufactured in Finland, but we also saw a broader weakness in other non-U.S. orders, specifically in the Mid East and, to some degree, in South America.

Operationally, we saw improving results in our North American operations, offset by somewhat weaker results in our European operations. In our Ocalla, Florida, operation, year-over-year labor productivity improved substantially and also improved each month throughout the quarter. We are continuing with aggressive lean initiatives in our Ocalla operations. In our operations in Finland and Holland, it was a combination of mix and some expense for new products that impacted the quarter's performance. As you will see from our-- as you saw from the guidance -- and I'll comment on it a little later -- we expect that to improve in the out quarters.

Again, we continue to expect to see overall margins increase on a quarterly basis as we move forward in the year as our mix of orders moving through all of our operations, coupled with productivity improvements, which are the continuing benefits of the lean initiatives we have been discussing, will lead to higher margins in the second half of the year.

Moving to our environmental products group, overall municipal demand remains very slow, but we did see a very nice increase in sweeper orders in the first quarter, a combination of delays from the fourth quarter and preparation for the spring cleaning season. Somewhat offsetting the overall slow municipal demand for sewer cleaners has been our introduction of new products and penetration of new niches. Also, this applies in the sweeper area.

For example, we just received our first order ever from the U.S. Marine Corps to replace all 28 of its airport runway sweepers for use worldwide. We also just received our first order ever from the U.S. Air Force for airport runway sweepers and the Air Force operates the largest fleet of airport sweepers in the world.

The refuse market remains extremely slow and while our plan is to offset some of this market slowness by gaining share through our dealer organization, we're in the early stages of integrating the acquired products within our dealer organization and that probably won't start bearing fruit until the second half of this year, as you may recall we suggested at the time we acquired the businesses.

On a positive note within this group, the recent demand for our industrial vacuum trucks and industrial water blasting equipment has been fairly strong. These products are sold to independent contractors who buy them in order to perform maintenance functions within industrial America. At this point, we are unable to tell whether this recent demand is the result of previous maintenance deferrals or whether the basic market is on an increasing trend. Overall, these product offerings represent about 10% of the group's total sales.

As you can see from Stephanie's guidance, we are looking for a substantial increase in margins in the second quarter. That is driven by the strong first quarter new orders for our higher margined mechanical street sweepers, a better mix of our industrial water blasting products and we did have some remaining costs in the first quarter from the closing of our facility in North Carolina.

Within our safety products group, our overall commercial industrial markets have not changed much since our last call. They remain fairly weak. Within the municipal arena, other than large jobs in the airport market for parking systems, our day-to-day municipal demand is weak.

For example, our largest product line is lights and sirens for police vehicles, both in the U.S. and globally. In the U.S., Ford Motor has indicated that their production of police vehicles, they estimate, will be down about 10% to 15% in 2003 and production of new vehicles is a key driver of demand for us. While we believe that, again, our new product offerings should offset some of this weakness, it will not offset all of it. In the European market place, however, our sale of police products remains very strong as we continue to gain market share in countries where we've previously had a small presence.

Our guidance anticipates quarterly sales for the group increasing over the low level of the first quarter. This is mainly driven by our increasing deliveries of large airport orders, which are in our backlog as we speak, as well as we anticipate the benefits of various new product introductions.

Overall, we just do not have robust markets to report on. Given the economies we are facing, we remain aggressive in our cost-reduction programs, which will not only benefit the short term, but will benefit us as demand comes back. Also, we're firmly convinced that our investment in and introduction of new products will also help to offset a little bit of our current market slowness, but, more importantly, prepare us to gain market share when stronger demand returns.

We will see increasing margins in the second half of this year as we recognize our improvements in fire rescue's operation and our other three groups recognize the benefits of the costs incurred in the first half of the year to reorganize operations. For the full year, we still believe that our previous earning range of $1.05 to $1.15 for the full year remains a good range. As we indicated when we provided this guidance, we are assuming a flat U.S. economy for 2003. If we are to end up in the high end of this range, it will require some strengthening in the U.S. manufacturing economy in the second half of this year.

As you may recall, much of our industrial product line has very short lead times and will respond very quickly -- hopefully positively but, unfortunately, also negatively -- to changes in the manufacturing economy.

And now we'll turn it over Jonathan [ph] for questions.

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 are on a speaker phone, please lift the handset before asking your question. One moment for our first question.

Our first question comes from Larry Baker from Legg Mason.

Joe, good morning,

Good morning.

Can you talk a little bit about-- in the-- in your new refuse truck business, did that make a contribution at all in the quarter? Are those profitable? Just sort of where that stands.

Yeah. We got no contribution in the quarter. As we, I think, indicated in the press release, the-- with a separate facility, we just-- the volume was so low that we couldn't carry all the absorption. So it was a slight negative impact in the first quarter.

And do you expect volume to pick up enough to offset that over the course of this year?

It's a combination of things. We-- as you know, we're planning on making some cost reductions in that area and we planned it at the time of acquisition, so we're still in the process of doing that. But we also do plan on volume pickup, not necessarily from the nature of the market, but as we get our dealer organization more active in selling that product. They are, as we speak, but sales and orders won't start coming in until the back half of the year.

OK. And then on your fire rescue segment, can you sort of talk about progress there as the-- as you move the Saulsbury lower-margined product through your production? Is all that done by the end of the second quarter and what sort of happens to margins in the second half?

Yeah, I don't-- You referred to Saulsbury, which he's referring to our New York manufacturing facility, which is the smaller, far smaller, of our two facilities, Ocalla in Florida and Saulsbury in New York, just to put that in perspective.

From a margin viewpoint, we expect a quicker improvement in our Ocalla facility as they had less of the types of problem products, for lack of a better term, that we discussed last year and in the first quarter. And in the Ocalla facility, we would anticipate those being -- and there's bound to be one or two, so with those exceptions -- fundamentally behind us at the end of the first half.

In the case of Saulsbury, as you may recall, we had a-- almost a one-year backlog as we entered this year for our facility in Preble. So, again, it's smaller, but it will not have the degree of margin improvement that we'll be seeing in the Ocalla operation in the back half of the year.

OK. And then, also, in your press release you mentioned that the-- your European -- I guess it's the Dutch -- operation there affected the quarter. Is that a limited problem or will that continue into the second quarter and second half?

No, we think it's a limited problem. In fact, as we look-- part of our first quarter margin increase at fire rescue will be a substantial turnaround in margin in European operations. It was a-- just timing things in the first quarter, which will not reoccur.

OK. Thank you, Joe.

Thank you. Our next question comes from Scott Krasig [ph] from C.L. King.

Hi. Good morning. A question on the outdoor, specifically sweepers. You spoke a lot about it on the last quarter call on a waterless sweeper that you were introducing and I was just wondering, you know, what the reception for that was and what the sales have been like for that?

OK. I can tell you the-- on the call -- I'm fairly sure, I don't have the notes in front of us -- that we talked about it being-- it was introduced at a dealer meeting and was going into production in the next couple of months. So at the sales line, minimal impact in Q2, starting with some, but minimal impact in Q3. On the whole, it's a significant new product for us and I discussed it in the context of what we were doing as far as spending monies for new products.

OK.

As far as a sales impact, I think this year, into the fourth quarter we might be seeing something-- some reasonable sales, but prior to that, it's going to be demos and introductions.

OK. And then on those sweepers or the big sweeper, the chassis that you get, do you take a margin on those chassis?

We sell it as a whole product.

OK.

We don't sell them-- You know, we don't say, ``Here's your chassis and here's your sweeping components.'' So it's difficult to answer that. Certainly we-- when we buy chassis, we have handling costs, we modify these chassis in order to accommodate our sweeping products. So there's profit involved in that.

OK. And then I guess one of your competitors has done pretty well with this waterless sweeper. I mean, do you think that, you know, you'll be able to take some of that market share back? Or how do you view, you know, the competitive waterless sweepers that are out there now?

Well-- Interesting question. I know that the competition you're referring to talks a lot about their market share. We feel we have a very competitive product. We know that our overall sweeper sales are substantially higher. In this segment of waterless, it's right now a very small segment, as I indicated, whether it's our sales or, the best we know, the market's purchase of waterless. But we feel pretty good about our ability to compete in the market place with our product offerings.

OK, great. Thanks very much.

Thank you. Our next question comes from Walt Liptak from McDonald Investments.

Hi. Good morning, Stephanie and Joe.

Hi.

Good morning.

In the EPG, you mentioned those two military contracts, Air Force and the Marines. Can you quantify the size of those and the time frame?

Yes. The Marine order I mentioned, it's in the range of $4m and it will ship over the balance of this year.

OK. What about the Air Force order?

The Air Force order, much smaller. It was a-- the difference being, as I indicated, we replaced all of the Marines' sweepers. The Air Force, much-- has a much greater worldwide fleet than the Marines, but it was our first order and I don't have an exact number. It was about 13 units and that would put it -- I don't know -- somewhere in the million dollar range.

OK. OK. And in the Wittke and Leach businesses, the restructuring that you're going to take, is that a purchase accounting charge?

Yes. I don't know that we talked about restructuring. I talked about we're doing some things to-- on their costs.

OK, that's right. The cost reductions that are planned.

Right. And that-- it will be purchase accounting, yes.

OK. And the margins at the time of the purchase looked like they were somewhere around a 7% operating profit for-- at least for Wittke.

Correct.

Is that-- after this cost reduction is taken down, I mean, what kind of a run rate do you think you could be at for this year or for next year?

The key is next year. I think this year we're still, you know, a real soft market and we don't have our dealers fully engaged. Next year we expect to have fully engaged dealers and we'll have -- if our plans go as we think we are -- we'll have, you know, reorganized this the way we want it going into next year. So I would say next year is more likely to be our beginning of run rate margins in what could still be a soft economy, OK? But it's up near that area that they were at. This year we will not get there.

OK. And then the incremental costs during the quarter, I wonder if you could break them out by fire rescue group, safety and tool and just the dollar amounts so we could back into kind of a normalized margin?

For tool is was about $600,000 in the quarter, for safety products, about $900,000 to $1m and environmental products about $300,000.

OK. Thank you.

Thank you. Our next question comes from Jack Kelly from Goldman Sachs.

Good morning. Joe, could you just kind of elaborate a little on the refuse truck dealer program? In other words, to kind of ramp that up to where you'd like it to be for next year, how many new dealers or existing dealers that you already have does this-- you know, do they have to hook into? In other words, how many dealers do they have now and how many will they have, let's say, by the, you know, first quarter of next year?

OK. I'm going to be a little careful with how much competitive information I put out on the phone call, but let me start by saying that we had quite a few dealers of ours that sold our Elgin and Vactor products that already sold a refuse line before we made this acquisition. What we now have is in our dealer organization -- these are rough-cut numbers -- we may have approximately 50 dealers and approximately 30 of those already had some refuse line.

OK.

None of those dealers had the Wittke brand.

Yeah.

Wittke sold, essentially, direct. So we have approximately 30 dealers who have refuse selling experience who are now likely to take over the Wittke product line and that will be a somewhat easier transition since they're already in the refuse market place.

Will they deal that exclusively or, in other words, do they get rid of their existing or it's maybe a combination of keeping what they have plus adding Wittke?

No. The way we operate, they're-- it's up to them, but with our-- Wittke being a front-loading product, the dealers that would be selling a front loader will be selling one front loader. They won't have on multiple brands of front loader, for example.

OK.

But it's strictly the dealer's choice.

And how many-- roughly, how many dealers-- well, you're saying Wittke had no dealers because it was all direct sales?

The vast majority of it was direct sales, that's correct. In the Leach brand, we inherited quite a few-- in fact, many of our dealers that we already had already had Leach. They were a common distributor already and that was, perhaps, 20. So our opportunity there is to take the rear-loading product to an opportunity base of 30 more dealers.

OK. Could you just comment-- you commented a bit on the overall market for refuse trucks being, you know, tough because of sales, et cetera. What's happening, you know, with pricing? Can you give us any sense of, you know, what Oshkosh or, you know, Heil might be doing?

No, I can't give you a sense of what they're doing. I can give you a sense that the market pricing is tough. Now, you know, there are a variety of competitors besides the two you mentioned, who are the main competitors, but I don't have any information on their particular pricing.

OK. Then just secondly, I know this is a tough question, but if we look at fire rescue, I guess I have been focused on the issue of you having too many orders for, maybe, vehicles that were too highly customized and so that was kind of the issue and you work through that backlog and things get better. And, you know, now the Netherlands has been kind of introduced to the equation but you mentioned that's going to kind of be out of it by the second quarter, then we have kind of the Ocalla and then Saulsbury. Could you just, maybe, comment on, you know, where Ocalla is, you know, vis-a-vis your expectations for the first quarter? In other words, it sounds like things improved modestly there from your press release, but if we look at that piece, are you, you know, where you want to be there?

And then maybe you could give us a little more background on Saulsbury. When does that begin to pick up in terms of margins?

Well, clearly, to try to answer your question, at this point we are not where we want to be ultimately at fire rescue. I think your question might have been did we make the rate of progress that has us very happy at the first quarter?

Yeah.

And I would say no. We're happy with the progress. We've made it. We see our productivity. We see some of the units getting behind us, but we still, you know, we probably could have done a little better there. But certainly we are making the good progress.

The reason we made the comment in the press release about our European operations, we had some key mix issues. And you talked about introducing the Netherlands, we're really lumping Europe together because Finland, our operation in Finland, as well as the Netherlands are both pretty much focused in Europe. And we know there will be a-- that it was a very short-term issue, especially in the Finnish operation.

There'll be a large swing there between their first quarter and their second. Historically, we haven't talked about them recently because they perform very well, but they get a lot of large orders at one time with their particular product offering. So they have a great deal of quarterly swing and that's been that way since we acquired them years ago. That's just the nature of their demand cycle.

OK. So Ocalla is kind of where you expect it to be and then what about Saulsbury, Joe?

Saulsbury -- it's still real slow. We're working. That backlog, which I mentioned was a full-year backlog, is tough. We're going to see little improvement. We'll see some, but it'll be little improvement in the back half, not substantial improvement. The only good news is it's a small piece of the whole pie.

The backlog you're referring to is the custom or highly customized--

Rescue vehicles, the highly customized rescue vehicles, which is what we produce in Saulsbury, New York.

OK. Very good. Thank you.

OK.

Thank you. Our next question comes from Alin Rosca from LJR.

Hi. Elliott Schlang, Great Lakes Review. How are you, Joe?

Good, Elliott.

Good. A few quick questions, if I may. Can you separate the currency effect on the quarter in sales and any relevant balance sheet items?

Yes.

In tales of sales I think it was $8m in the quarter.

And I assume that was positive?

Yes.

OK.

Yeah. In terms of the balance sheet, we did get a translation-- a cumulative translation gain of about $10m. So I think that's the balance sheet impact. You know, that goes into other comprehensive income. But in terms of earnings, it was about 9/10 of a cent.

About what?

Nine-tenths of a cent.

Nine-tenths of a cent in earnings, positive?

Right.

And in the sales growth for the quarter, what was the internal sales growth if you exclude the two acquisitions and the currency?

Let's see, sales versus prior year?

Yes.

Let's see. About a 40%-- about half of it was internal and half of it was refuse or currency.

I see. So of the 19%, sales would have been up about 10%, adjusted for currency and the two acquisitions?

I'm going to correct that.

OK.

Forty-six million dollars and-- yeah, actually about two-thirds was real increase, was not refuse or currency, so about a third of it was refuse and currency.

OK. So two-thirds of the 19% sales growth was internal?

Yeah.

OK. And secondly, I notice a two million additional shares. That was for the acquisition, I assume?

That's correct.

Any other items in there or the bulk of it was the acquisitions?

Almost 100% of it, because we're-- we have no other items where we're issuing shares.

And you mentioned the restructuring in the debt, the short-term borrowings. How much of your total debt is currently at variable rates and are you considering nailing any of that down on a permanent basis?

It's right now about half fixed, half floating, and, no. You know, given where the economy is, obviously, it's something we look at very regularly, but given where the economy is today and the relatively short duration of our leasing portfolio, we're pretty comfortable operating in the 50/50 range.

And SG&A seemed awfully large, given the fact that you've been on these restructuring programs and trying to get those costs down and jumping that much, percentage-wise, about 20%, and being up as a percentage of sales, I was surprised. Any items in there that we should be aware of that were not discussed earlier?

Well, certainly, year-over-year one of the big differences is the addition of SG&A associated with the refuse acquisitions. In addition to that, the restructuring charges, which were a little-- about $2.2m, I think all but $300,000 of that has come through SG&A. In addition to that, our big jump in our fire rescue sales quarter-over-quarter comes with a fairly sizable variable commission and reimbursement to dealers for some of the ancillary products that go with the vehicles.

And two final questions, one on the pension fund. How do you-- what are you anticipating for the rest of the year? Are you adequately funded there or would you guess that you'll see some catch-up?

We-- at the end of 2002 we actually had about a $32m gap between our liabilities and our assets. So we were underfunded.

Right. That's why I was asking.

Yeah. We don't-- we think our required funding level this year we may have about $1m for our Leach-- the pension fund that came with Leach. We don't think-- so we don't think we're going to be in a position where we're required. Having said that, assuming we can get a tax deduction for it, we are likely to make a contribution this year on the order of the size contribution we made last year, which was the $5m.

And lastly, it seems that there's been one restructuring charge after another in each of the last many quarters. At what point, Joe, do you feel, looking out to next year or even later this year, at what point will the company be on an operating basis without facing these recurring restructuring charges?

Well, I think that's-- I know you asked that question on our last call and I'll--

I haven't given up.

So I want you to understand that, you know, that's one of the reasons why we don't have pro forma statements, because we're not trying to point to or trying to separate out these activities with-- from our earnings. We're not doing that to begin with.

But secondly, to the meat of your question, we're really adjusting to what the economy is leaving for us here. And in the first quarter, as we mentioned in our comments -- and we lump all these activities into, quote, restructuring. We're not using that in the accounting sense of the term, which is why we didn't set out pro forma statements. We're trying to lump it into all activities we're doing to adjust our business to what's going on in the world.

So to your question, if this-- let's assume the economy, I don't know, nose-dives. Then we probably will have more activities. Now they may be in nature of people, they may be in nature -- I can't foresee any plant closures. We've talked about we still have some small satellite facilities that we plan on, as we get better, if we don't need them we're going to consolidate them. But that's the kind of thing we're talking about in, quote, restructuring.

So another example to your point on SG&A. Our full-year forecast, which supports the earnings we've given you, has our SG&A as a percent of sales, down nicely in 2003 from 2002 and some of those are activities that are occurring as we speak.

So that's what we mean when we use these terms ``restructurings'' is we're adjusting to the economic environment.

Good. Thank you.

Thank you. Our next question comes from Mark Jacobs [ph] from Capital Research.

Good afternoon, Joe and Stephanie. I had a few questions about cash flow and also the dividend. So I think, Joe, you had indicated that the normal payout ratio for the company was 35% or maybe 40%. If that's the case, then that would suggest the underlying normal earnings power of something north of $2 and, while that's hard to see today, first of all, are those numbers right? Is that a level of kind of mid-cycle or normal earnings power that you're comfortable with?

I think it is the rate at normal earnings and it is the rate we've-- we haven't changed that rate, by the way, and that isn't a new pronouncement. That's been set forth in our annual report.

Right.

So that's nothing new. It's just giving you the background as I describe what we go through. But, yes, that's the target in a normalized earning range.

So in other words, there's more than let's call it a dollar per share in earnings power that's being masked by the fact that you have lower-than-normal volume levels?

I'm not quite sure I understand that question.

Well, I'm trying to figure out the road map from $1.05-$1.15 range to the $2 normal. Is that simply because we don't have enough volume running through your plants because of the economy or are there some other factors that I need to take into account to get there, i.e., we need to see more cost reduction or other actions in order to--

Now I understand. The question to get to-- and let's use a number, let's use $2 a share as a talking point only. The road to get there is a combination of volume and improved operating margin. I don't think it's a major issue of further cost reduction except to the extent that our lean initiatives will allow us to continue reducing cost. It isn't like we have on the horizon that we're taking out four plants or that type of thing.

Right.

But there is no question that we need help both at the top line, we need recovering demand, and we know very well that our fire rescue, especially, their operating margins are at unacceptably low levels. We also know that, I guess, the next-- tools and our operating margins there are down in the 12% range. So it's going to be a combination of demand and internal operation improvement.

Now mostly in tool it's going to be demand that will turn those margins around. We've done a bunch of reduction of capacity there and realignment of our manufacturing so that's a high variable cost--

Low variable cost.

--low variable cost business, right. So that when we get the demand back, it's going to drop a lot to the bottom line there, as opposed to fire rescue, where we need operational improvement.

OK. And then the other question is just simply, what are you looking for for capital spending for the year, for depreciation for the year, given the impact of the acquisitions and also debt repayment for the year?

We're looking-- capital spending, we're looking at $22m to $24m. I think our depreciation and amortization is going to be around $26m for the year, so we're a little bit under that depreciation charge.

OK.

With respect to debt reduction, we are forecasting a reduction in our debt to capitalization to 40% by year end, where it's 43% now. So probably another $30m reduction.

OK. So that's kind of operating cash flow of $90m, capital spending of $25m and then you've got roughly $40m. OK. Yeah, that's about right. OK. Thank you.

OK.

Thank you. Our next question is a follow-up from Walt Liptak from McDonald Investments.

Hi. Thanks. In your comments you said the thought that the replacement for Andy Graves was going to happen sometime in the third quarter. It means that, I guess, you must have gotten a lot of resumes or you're getting a good response. Can you talk a little bit about the type of candidate that you're looking at now?

Actually, no I can't. What I-- I'll give you a little more-- because we engaged an outside firm who is working with us in this search and I meant to-- the search is active and going forward and we are contacting people. At this point, we don't have-- I really don't have much more to describe than that, Walter, with respect to where we are.

When I talked about the timing, since we are aggressively out there looking with our-- the firm that's working with us, that's why I'd anticipate about a three to four month time period.

OK. Are you looking for a senior person or someone that was similar to Andy Graves in terms of the experience level?

I think I'd have to say we're looking for -- I hate to use a trite term -- but we want the best athlete. And we're looking for the best person to come with the right kind of operating background, with the-- and the other characteristics we're looking for. And if I had more of those resumes you're referring to in front of me I'd be in a better position to answer that question, but since I don't, I'd just be speculating because the instructions we've given to our-- to the firm working with us is we want the best person meeting the qualifications we have.

OK. Thank you.

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 David Gold from Sidoti and Company.

Hey, good morning. Joe, you commented that you thought the sign sale would come to fruition sometime soon. Do you expect to take further write-down or you expect to catch somewhere near the carrying value on that?

No, I indicated in the comments that it has-- we expect no material impact on our results.

OK, fair. Thank you.

Thank you. Our next question is a follow-up from Scott Krasig (ph) from C.L. King.

Hi. Just a quick question. In the street sweeping business in Europe, are they ahead of us, behind us, in terms of using waterless or, you know, being concerned with the environmental impact to the area?

Interesting question. We do have a sweeping company in Europe. I don't know if I could decide it as ahead or behind. They are very environmentally oriented. They're much closer to our West Coast concern than our East Coast concern. They do-- for example, we have a lot of mechanical machines here and Europe doesn't do a lot of that because they want less particulate and less dust in the air. So they have a high environmental concern. They also-- I don't know if that makes them advanced or different, a very different machines, which is why we don't export many machines from the U.S. to Europe and the converse, very few come from Europe to the U.S.

What have been the buying trends over there for the last six months?

Well, it's difficult to tell. They had a lot of regulatory change coming into this year so that there was a real slowdown in orders. We had to do a lot of changing of our product in order to comply with the new regulations. We talked about that as negatively impacting Q1 in our sweeping business and that was in Europe. Those-- we have now done that, gotten the euro engines and a bunch of other things that were required of our product so that we are now-- you know, orders are picking up because folks were holding off on their orders until they got the new machines.

So that's probably the biggest impact. Other than that, the overall economy, pretty slow over there.

Pretty slow. And then just who do you view as your biggest competitors in that segment in Europe?

In Europe?

Yeah.

Probably one company called Bucher Schorling [ph].

And that's a European company?

Johnston, to a degree, which is a public company.

OK. Thank you very much.

Thank you. Our next question comes from David Gyras [ph] from T. Rowe Price.

Hi. Just a couple of quick housekeeping items. Just the restructuring that you took in Q1, it sounds like it'll be sort of repeated in Q2. Can you comment, is the dispersion of the restructuring dollars similar in Q2 to Q1? And also, do the restructuring dollars sort of flow, as well, into the second half of the year or should most of the restructuring, if the economy is flat, sort of be over in Q2?

Let me start by saying about 90% occurs in the first half. We have a few small businesses where, from an accounting basis they have to trail out some of their costs into the second half, but 90% of it occurs in the first half, which is why I made the comment that our margins in the first quarter are taking all that cost-- excuse me, first half. When you compare our first half to our second half, you have not only absence of the charges, but they then have the full benefits of the results.

So there's a pretty positive impact of those activities. Most of them have occurred and the balance will be occurring this quarter. So they're not just forecasted items which we know are occurring.

OK. And the dispersion in Q2 should be somewhat similar to Q1?

Q2 is probably about the same amount for tool, probably another $600,000 and then most of the balance is safety products.

OK. So safety actually has more sequentially than in Q1?

Just so you understand, you know, under the accounting rules, it really is driven by-- when you-- exactly the timing of when you sever people or cancel visas, et cetera, and because we're moving out and transferring some of that business to another plant, it happens gradually.

Two other questions. On the refuse side, I just want to clarify one thing. There was a comment made about there was no contribution from refuse in Q1. Does that mean-- I apologize, does that mean the business was break-even or does that mean that the business was neutral on an interest expense versus EBIT level?

It was actually a small loss, small operating loss.

Is that seasonal, Stephanie, or is that-- it's just a very, very weak market?

It's a very, very weak market.

OK.

We've talked about that market -- and just a quick refresher there -- as we went into these acquisitions at the end of the third quarter last year, the market was going soft throughout the year. We anticipated a soft market. I can't say we anticipated one continuing to get soft through the fourth quarter and the first quarter.

OK. One other-- one other question. On the-- Can you talk about the pricing front? Joe, you talked about it in sort as a relatively-- on the fire and security business-- I'm sorry, on the fire and rescue business, you talked about maybe a flat market out there, municipal budgets under pressure. Are you seeing any kind of pricing pressure or are the prices that you and your competitors are being able to put out in the market holding?

I think there's always-- there is price pressure. It's hard to describe exactly how much. I think that overall from -- and this is rough cut and directional -- from a year ago, our net pricing is probably up from a year ago, just to give you a sense for that. But in selective areas, absolutely. You know, competitors that-- you know, there can be a lot of price impact if somebody's trying to get share in a particular area.

So I don't want to-- there's certainly not price slashing going on, none of that, but, you know, I'd be-- I'd have to say, yes, it's a competitive market place.

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.

OK. Well, I thank you all for joining us. We have a lot of work to do here, but we're looking forward and we have improvements coming. We hope we've described them well enough to you to understand those, that this quarter should start showing those operating margin improvements.

So thanks for joining us and we'll talk to you next quarter. 'Bye.