Federal Signal Corp (FSS) 2003 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to your Federal Signal Corporation's third quarter earnings release conference call.

At this time, all participants are on 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, Mr. Joseph Ross, CEO and Ms. Stephanie Kushner, CFO. Ms. Kushner, you may begin.

Morning and welcome. In preface, please remember that some of our comments contain forward-looking statements about the future prospects for Federal Signal. Please refer to our 2002 annual report to shareholders, our recent SEC filings and press release and the release that we've issued in conjunction with this conference call for a more detailed discussion of the risks that are involved in these forward-looking statements.

I'll start with a brief summary of Q3 financial results. In line with our pre-announced lower guidance, we reported diluted earnings per share from continuing operations of 21 cents, on sales of $288 million.

New orders declined to $264 million, 8% below sales and 9% below prior year. The reduction reflected weaker U.S. municipal market orders and the absence of last year's $19 million award for the initial phase of the Dallas -Fort Worth parking system project. Partly offsetting was the addition of orders associated with the new refuse trucks body businesses.

We ended the quarter with backlog of $355 million, down $38 million from last quarter and down $73 million from this time last year. As you will recall, our fire rescue backlog had been abnormally high, particularly last year, due to production problems, which were limiting sales.

Quarter end backlog by group was as follows: for environmental products, $79 million; fir rescue, $229 million; safety product, $35 million; and tool, 11 million. Sales of $288 million exceeded prior year by 10% up 6% in the U.S. and up 19% outside the U.S. versus prior year.

The non-U.S. increase is half due to the impact of the weaker U.S. dollar or the stronger foreign currencies.

Our gross profit margin was 27.1% in the quarter, up from the second quarter this year, but below last year's 28.3%, versus last year the biggest single factor affecting the margin was the addition of the refuse companies.

As we said in the press release, margins in these businesses continue to be adversely affected by under absorption of fixed costs due to the weak sales volumes.

Joe will review more the plans for restructuring these businesses.

Selling, general and admin costs, as a percent of sales averaged 21.3%, up slightly from last year, due to sharply, in fact, 53% higher sales from our Finland-based operation. And with these sales, there are typically significant commissions and loose equipment add-ons that are charged to the customer and then included in our SG&A costs. And tyer'e essentially zero or close to zero margin.

Outside of fire rescue, the other three groups all incurred materially lower SG&A costs in the prior year as a result of their restructuring. Backing out the Finland effect, SG&A would have been 19.6% in the quarter, well under last year.

Our operating income was $16.7 million, or 5.8% of sales, down from 21.6 million and 8.3% of sales in 2002.

As expected in the quarter, the translation impact of the weaker dollar benefited earnings by one cent, versus 2002, and it's now three cents cumulatively for the nine months.

By group for the quarter, environmental products revenue was up 28% consistent with our guidance. Their operating margin of 6% was shy of the mid 6% guidance that we gave due to slightly weaker refuse results.

First rescue revenue and margins fell significantly below the guidance, due to the falloff in Arial unit sales and lower production as we described in the pre-release conference call a few weeks back.

Safety products revenue was up 5%, with an operating margin of 13.8%. Also as stated in our recent conference call, this business was impacted by a falloff in U.S. police products orders and the delay in the installations of two major parking systems, which are now on track.

Tool revenue was down 2% from last year. Margins declined to 9.2% below our guidance due to production and efficiencies associated with the closure and transfer of business from the Jamestown plant, also volume reductions and price pressure in our cutting tools business and an inventory adjustment in our plastic mold tooling business.

Below the operating line, corporate expense declined from last quarter and again last year, due in large part to reductions in incentive accruals given our worsened earnings environment.

Interest expense of $5.1 million continuing at the prior run rate. Our tax rate declined to 16% in the quarter, below the 2002 level. Our large permanent differences, specifically our non-taxable municipal interest revenue, become relatively more significant when our operating earnings decline. So the lower our operating earnings, the lower our tax rate, all else equal.

Our operating cash flow in the quarter was $10 million, after a $4 million discretionary pension contribution. This raises our year-to-date operating cash flow to $58 million.

Our full-year outlook is for cash flow in the 75-$80 million range. Our working capital performance is not as good this quarter. Day sales outstanding increased to 55 for the quarter. This is the result of customer mix, which is in part, because of our increased, internal sales, which have been growing much more rapidly than our domestic sales, but there have also been instances where our business have had to offer increased payment terms in the current business environment.

This remains a focus for us in the fourth quarter.

Capital spending remained low, $12.5 million year-to-date, about equal with last year. We expect the spending to continue low, we had forecast $20 for the year, but that figure is looking a little high.

At the end of the quarter, the ratio of manufacturing debt it capitalization was 42%, unchanged from last quarter.

We were well within all our debt covenants at the end of the quarter and expect to continue to be so.

Looking at the fourth quarter, our revenue should be closer to the level achieved in the second quarter. We would be looking at a range of 305 to $315 million and we expect a modest increase in the consolidated operating margin to the 7% range.

In total, EPS should be in the range of 25-30 cents for a full year number of 80-85 cents.

Environmental products groups revenues will be up five to 10% with an operating margin about flat with this quarter, still about 6%.

Fire rescue is projecting higher revenues, up 20 plus percent. We should see some improvement in operating margins, returning them to the 5% range.

As we look forward, we've lowered the operating margin estimate given the uncertainty surrounding our North American sales mix, particularly our higher margin sales of Arial equipment, and also due to the plant consolidation activity that's underway in Ocala. Again, Joe will talk about that a little bit more.

Safety products revenues will decline slightly year-over-year, due to the weakness in the U.S. Police products market and the delay with the Dallas-Fort Worth airport contract. Also fourth quarter last year was boosted by a very large, one-time order from the Spanish National Police.

So we're expecting sales for safety products down about 5% from last year, and operating margins in the, should stay in the 14-15% range.

Tools expecting revenue flat with last year and an operating margin of 10-11% down slightly from last year.

Corporate expense should stay in the 3-$3.5 million range for the quarter. Interest should continue at the $5 million quarterly run rate, and the tax rate should be in the 25-28% range, mainly depending on the level of operating earnings.

I'll turn to over to Joe.

Good morning. I will start with some general comments and then I will comment on each of our four groups individually.

I would first like to address our cash dividend. As I'm sure all of you know, last week our Board of Directors declared a dividend of 10 cents per share on our common stock, down from the 20 cents it had declared the previous eight quarters.

I believe we explained the logic for this in our press release this past Friday, but I would like to make a few additional comments.

First and foremost, it remains the strategy of Federal Signal Corporation to include dividends in its key return to its shareholders. We have not changed our long-term policy, and in intend to pay between 30-40% of earnings over the business cycle.

At the same time, I believe everyone has been aware that we have been paying our dividends well in excess of our long-term payout targets and well in excess of what is healthy for a corporation on a longer-term basis.

We had intended to go through the bottom of this cycle while holding our dividend firm; however in view of the surprising downturn in our markets this past quarter, which lead us to revise our full-year earnings guidance downward, and would suggest that the bottom of this cycle would last somewhat longer than we anticipated. It was no longer prudent to retain a dividend payout, which based on that new guidance would equal approximately 100% of our earnings.

We mentioned in the press release and I want to stress this again, this is not a liquidity issue at Federal Signal. While our new earnings guidance will reduce our total amount of cash flow for the year, as indicated in Stephanie's remarks, we still remain solidly positive in our generation of cash flow.

In this period of market uncertainty, we will be investing our cash in product and process improvements, as well as in our balance sheet. Separately at this time, we have no additional information relating to our replacement for our Chief Operating Officer who I believe you all know left earlier this year but we are still targeting a Q4 announcement. We'll be doing an overall market perspective. The major change since our July conference call has been the additional weakening in our municipal marketplace within the United States. While we covered that fairly extensively during our September 24th conference call, I will make a few additional comments on that market.

We had expected and in fact planned for weak domestic/municipal markets this year, but they have fallen off much more severely in the Q3 than we had anticipated, especially in view of the fact that many of our municipal customers have new funding available on July 1 of each year. Over the course of the year, we have gone from an approximate 5% increase in municipal orders in the Q1, to a 15% decrease in United States municipal orders in the Q3. While the broad issue is shortfalls in the municipal budgets, we believe that part of this issue is that the federal Homeland Security monies are not flowing into the cities as quickly as they anticipated. This issue was surfaced at the United States Conference of Mayors held last week in Miami, and we know that the slowness in funding is further impacting many of our municipal customers. If there's a positive part to this situation is that the federal money has been authorized, and at some point, it should begin flowing more freely to our municipal customers.

While the majority of our United States commercial and industrial businesses remain stable, we are not yet seeing increasing demand to offset this municipal weakness. While our chosen markets are very slow right now, we remain very comfortable that our markets have positive long-term outlooks. As you may know, we regularly revisit our market shares and we are very comfortable that the vast majority of our businesses are either increasing or are maintaining their #1 or #2 market positions. We mentioned in our press release that we are focused on process improvement and investment in new products for growth. Each of our groups has substantial initiatives along these lines, and I will discuss some of them as I cover each of our groups' performance.

Turning to that performance, I will start with our tool group. As you saw in the press release, sales for the quarter were down slightly for the past year, and this decline was mostly driven by a fall-off in our diamond tip cutting tool sales. These sales are mainly driven by production of aluminum engine blocks used in passenger automobiles as well as the capital programs related to passenger vehicles. As you may know, while light-truck production year-to-date has been up, our products are not used in the manufacture of cast-iron engine blocks that go in trucks. Thus the downward trend in passenger automobiles affects us more negatively than the combined statistics that include both passenger and light-truck.

Our punch-and-die component sales, which again serve the broad metal stamping industry, were up 2% before the influence of positive foreign currency translation. Those sales were slightly positive, both in North America, as well as in our European markets. As we mentioned in the release, our margins were impacted by an inventory evaluation adjustment, and Stephanie also referred to that , equaling approximately 1 cent. Outside of the passenger automobile related business, our broader metal-stamping product markets in the United States seem to be firming up a bit. Not withstanding there slow markets, our tool group has a variety of initiatives underway which should provide for both share increase, as well as increased business as their markets return. The plant that we opened in Portugal has been growing well, and while tool sales this year has been modest, we expect them to double in 2004. Again this plant was started up late last year in order to better serve our European marketplace. We had mentioned in the past that we believe that our customer set will be much more globally positioned when United States manufacture starts growing again. Along that line, we have initiatives underway in China, Germany, Mexico, and Canada which are intended to address the growing manufacturing presences in those regions.

Moving to our environmental products group, with the exception of refuse markets, our overall marketplace is somewhat weaker than last year. We are seeing some strength in our industrial commercial products, and that is offsetting some additional weakness we are seeing in our municipal marketplace. Within this group, our refuse marketplace remains our key market issue. As we have mentioned in the past, the total refuse-truck market has declined for six straight quarters, and there is no near-term indication that that will change. Within our refuse business, we have announced a reduction in employment of approximately 200 employees. Most of this reduction relates to a plan to exit a components/production facility in , British Columbia that really does not fit within our group manufacturing strategy. The cost associated with this reorganization will not represent an earnings charge as reserves for those costs were included in the opening balance sheets for these refuse truck company acquisitions.

Separately within the refuse marketplace, we mentioned in our press release that we are negotiating a new agreement with waste-management, and that it will be for a smaller territory than we previously had. It is important to note that the key information is that we are negotiating with them, there are no final contracts signed with us and to our knowledge, within any other equipment manufacturers at this point in time. So the information we are discussing is subject to final agreement with a contract with waste-management.

As I said, it will be a smaller territory than we previously had; we mentioned that in the press release. While we did not know what the demand will be pursuant to this prospective contract, we are fairly sure, at least in the near term, that the volume supply to this customer will be materially reduced. As was our strategy at the time of acquisition of our refuse truck companies, we will be offsetting this over time by the volumes generated through our distribution organization to both municipal and small commercial hauling customers.

The actions we have taken through our refuse integration will reduce our future annual operating costs by approximately $3 to $3.5 million per year. However, we still need to see some market recovery before this business begins making its significant earnings contribution to Federal Signal.

On a more positive note, the environmental products group is doing quite a bit in the area of new products to drive both market share and an additional growth when our markets return. In the street--sweeping, we have now introduced both of our mechanical, waterless sweeping products, and while their introduction is recent, we feel very confident about our ability to generate sales in this niche. We have developed new higher horsepower water blasting equipment which will be launched this quarter. We just recently introduced a new, improved industrial vacuum truck which has had a very successful launch in the United States industrial vacuum market. On the refuse truck side of the business, we just released new refuse body for our rear-loaders and we are partnering with Caterpillar in bringing some of their technology to the refuse truck marketplace. We believe that we have identified several technology gaps within refuse, which we plan to close with new products. While these new products will be sold through all of our channels, in terms of waste-management for example, we believe that filling those technology gaps may provide an opportunity for incremental business beyond the parameters of the proposed agreements we are negotiating and we referred to earlier.

Moving to our safety products group, our markets our mixed, as we have seen some firming up in United States businesses which provide MRO maintenance repair operations products to industrial America, while we have seen some further weakening in certain of our municipal marketplaces, most certainly our police products.

From an earnings viewpoint, the key second half issue in the delay in installation of our Dallas/Fort Worth trucking project which we referred to in our press release two weeks ago. At this time, those delays have been resolved, installation is moving forward, and while overall profitability on the job has not been impacted, more of it will be delayed until next year as we indicated in our last conference call.

Also as we discussed in our earnings release, our police markets have slowed substantially in the Q3. While we believe that state and municipal crises are the major impact and even are significantly impacting the demand for high-profile police products, it is exacerbated now since many of these police departments and in fact, front-line firefighters as well, were anticipating the federal funding for their projects that I referred to earlier. This is the Homeland Security funding, separate and apart from what we've discussed in the past about FEMA funding for fire service in particular. From talking to a couple of municipalities, the situation is that they have increased expenditures for additional anti-terrorist related training and activities, but the promised federal funds have not been flowing as they anticipated. As a result, we continue to see municipalities diverting funds, much of it away from capital expenditures for our types of product.

On a more positive note, as a result of this market softness and the actions we have taken in response to that, operating expense in the Q3 for this group were down 10% from the Q1 and Q2, and our overall sales were up slightly. We expect this relative percentage for operating expenses to continue at this improved level. Notwithstanding the weak markets in this group, we also have quite a few new market initiatives we are pursuing. For example, we have mentioned that a great deal of our large airport activity has been postponed the last several years and it looks like it may be picking up in 2004. We are optimistic that our success with our parking system at Dallas/Fort Worth will lead to other large airports considering that type of system. Within the markets for our outdoor warning systems, the Federal Emergency Management Association is in the process of updating its outdoor warning systems guide, which is used by municipalities throughout the United States, and that update will call for a significant improvement in much of the outdoor warning technology in the United States. On the military front, the Department of Defense has updated its criteria for warning and notification in all United States military installations, beginning in fiscal year 2004. That initiative will result in warning system activity over the next few years throughout the United States military system.

So you see, we have quite a few new market initiatives that are coming aboard in the next couple of years in this group. And more broadly, each of the units within this group continues to focus their investments on new products, which we are confident will lead growth of sales as well as market share. Lastly, our fire/rescue group. From a market perspective, the market is getting tighter. While we indicated that the year-over-year fall-off of orders of 22% in the Q3 is not indicative of the overall market but rather of the timing of certain large orders in our Finland-based operation. Notwithstanding saying that, clearly the market is down somewhat from last year.

As we pointed out in our press release, we are very much surprised by the downturn in sales of our higher-margin aerial products in the Q3. For example, our number of identified prospects for aerial sales has not diminished yet we are seeing more and more of our customers delay their decision-making. Another example is for the first six months of this year, our sales of aerial devices were up year-over-year, and in fact we believe that we gained some market share through the first half of the year. From a profitability viewpoint, it is very apparent that we did not accomplish our goal for the Q3. From an operating viewpoint, our margin decreased for two key reasons. First during the quarter, we had a sales mix of lower margin products, as we had quite a few deliveries of rescue trucks again, these were manufactured in Preble, New York as well as a large Brazilian delivery which Stephanie referred to and which included a large amount of equipment.

At the same time, we had lower deliveries of our higher-margin units in the United States as well as custom pumpers. You may recall that most of the rescue trucks that I referred; they were manufactured in Preble, were in fact logged in the Q3 of last year, and carried with them low margins. As we indicated in the press release, our operational progress in the United States fire-rescue operations in the Q3 was not at the rate we anticipated. As a result, it slowed down deliveries, moving them into later quarters, and we also had an increase in production costs in the quarter. As I believe we discussed in our July call, we are planning on closing one of our four plant operations in Ocala and consolidating that activity into the remaining three, hopefully finishing in the Q2 of next year. We began that activity this past quarter, realigning some production in three of our four plants in Ocala. Simply stated, that realignment did not go as smoothly as anticipated. We believe that disruption is now behind us, and should not impact our Q4. It clearly had a significant impact on our Q3 both in our cost-absorption as well as in our deliveries. With respect to our forecast for the margin you heard from Stephanie and moving into the first part of next year, we are aware that we need to execute the remaining portion of this consolidation in an excellent manner in order to avoid the disruptions of the Q3. We believe that we are on that track, but we will know when it happens.

We also made reference in the press release to increased operating expenses as a result of strategic initiatives. While there are a variety of things that we are doing to help grow this business, such as the development of new products, one example worth noting is our establishment of a retail branch in California. While our normal and continuing practice is to operate through independent dealers, we have started up a retail outlook, the full cost of which we carry in our operating expense. Our plan is to establish a running rate of business and then fill the ongoing operation to a lieutenant dealer. When comparing our SG&A expenses, and thus a proportion of our overall operating margin, this is an endeavor that we just began this year and was not in our last year numbers.

And that is the case with some of the other strategic initiatives which we won't necessarily get into detail over on this call. Notwithstanding our significant disappointment with Q3 operating performance within our U.S. facilities, we do remain convinced that the local management team is pursuing the appropriate initiatives, and we are seeing results. For example, from a quality viewpoint, our product defects in customer inspection in September were 1/4 the number we had been seeing in the beginning of this year. Also this year, we have dropped our lead time on our Ocala products by 20% and on our Preble, New York products by almost 40%.

Also, since the beginning of the year, our sales per employee are up 25%, driven by improvements on productivity. Year-to-date, we have freed up approximately 30,000 square feet of space through lean initiatives in Ocala, Florida and more will come as we consolidate our aerial plant early next year. Our inventory turns have improved by 17% over the last year, mainly as the result of lean initiatives. Though we don't usually measure market share in periods of less than a year, we also just received data on North American fire sales which indicates that our market share increased slightly in the first half of this year, with our share in the aerial segment up by several points. Again, while we are not at all happy with our results in the Q3, there are a lot of good operational things occurring within our fire-rescue group that should lead us to higher levels of profitability.

I'm sure you've noticed that I've provided you with a great deal more detail for the initiatives going on in each of four groups. I think it's important for you to understand that while our overall market remains slow at best, we are pursuing our process improvement and investment in new products, and we feel comfortable that we are doing all the things to prepare us for earnings growth, some of which will occur without strong market rebound and the balance of which depends on a market rebound. While I only made specific reference to our lean initiatives in our fire/rescue group, this does remain a focus across our company and we continue to see improvements in quality, throughput, and cost.

We are just entering our planning process for 2004, and therefore we will not be giving specific guidance until January of next year, just as we did in January of this year. But I did want to make some preliminary comments on our broad market outlooks. Unfortunately, as I am sure you can tell by our comments in the press release as well as this conference, we don't see anything that would indicate robust market growth for our company in 2004 either industrially, or municipally. At the same time, we feel that our industrial/commercial businesses have been at the bottom of their cycle for most of the year, and most recently have been firming up somewhat with the exception of the passenger car and automotive market segment in the United States.

Municipally, we are far less certain of the direction of that overall marketplace in 2004. Our general thought for overall municipal demand would be that it is likely to be somewhat down in 2004, perhaps in the low single-digits. However, our best knowledge is in the specific capital goods segments of that market in which we operate: players, safety products, environmental products, outdoor warning sires, etcetera. If in fact, the municipal marketplace broadly is down in the low single-digits, we would expect that our products' budget priorities would allow us to outperform that market place in 2004.

I know that I am only giving very broad, general market statements, but especially after the sudden fall-off in certain of our municipal markets in the Q3; it is especially difficult right now to forecast our municipal markets. And again, I would repeat, we will be providing specific guidance in our January conference call.

And now I will turn it over to Jonathan for questions.

Thank you. 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 and you wish to remove yourself from the queue, please press the # key. And if you're on a speakerphone, please lift the handset before asking your question.

Once again, if you have a question at this time, please press the 1 key on your telephone. Our first question comes from Larry Baker from Legg Mason.

Good morning.

Good morning.

Uh, can you just go back to the environmental products segments if you would, and talk about it. So you have produced that waste-management strictly through the front-loaders, and no more side-loaders, is that way this looks?

We had very few side-loaders to begin with.

Right.

Our major contract has been front-loaders all along with them. Side loaders are not an issue, but in the front-loader area... If it goes as we're negotiating, we would anticipate having a smaller geographical share of the United States market than we did previously. At least per this contract.

Can you talk about just relative revenues from the smaller contract? I've been using sort a $30-$35 million run rate, and I don't know if that's right or not. But can you talk about what would do relative to that, or what the actual number was?

Actually, I can't. I'm trying to figure how to answer the question. I don't have the absolute numbers, and frankly I have to say that even if I did, I'm not sure I would disclosing those number. I'm not sure if you're referring to waste-management in particular, but we generally don't talk about numbers for specific customer sales. But as I am attempting to answer your question, I know that it is far less than we had anticipated in 2003 for example, because of the significant fall-off in the refuse market broadly and demand from waste-management in particular. We don't see that changing early in 2004. So overall demand has been less in 2003 than 2002 including waste management, which will probably continue low in 2004, but it is going to be significantly driven by the economic issues. If there is a economic/industrial recovery, if that starts growing more in 2004, then those vibes will go in a different direction. I know I'm not giving an exact answer, but that's because we don't have one, we don't know. These contracts as we negotiate them, have neither minimums nor maximums.

If you just look at the savings that you're taking out of this business with the closing of that one small facility, and the mid-range of what you would expect from the waste-management contract, will this business be accretive at all in 2004? The refuse-truck business, that is.

It's going to be marginal, marginally. So if you say accretive at all, on a marginal basis in 2004 based on our current outlook for the economy.

Okay. And then, I guess the orders in the fire/rescue business. So you're looking for going into the Q4 next year, that you think that orders will be down in the low single-digits. Is that a fair statement?

I think that's a fair statement.

I mean, you've had problems with it obviously, operational components giving you margins. What in a declining revenue environment, what is the prospect of margin improvement that you would look for next year?

As we indicated when I talked about it, we don't have a number on that. We have not gone through our plants. I can tell you what it's dependent on, and that is the improvements we're going to achieve this year in U.S. operations in the gross margin arena. That is what going to drive what that operating margin will look like in the next year. What I tried to suggest is that as we are getting into our planning process, that's exactly what we get into. Do I expect improvement in margin? Absolutely. Do I have a enough of a good feeling for the number to provide guidance at this point, I have to tell you the answer is no.

Okay. And then just one question on the airport issue. The delays, can you sort of characterize these? This is where they were unable to decide what they wanted, you were unable to deliver? Can you do a finger-pointing there and tell us?

Well, I don't want to point any fingers, as we are all working together but it wasn't that we couldn't deliver as in these large projects for example. And they're brand-new types of products and brand-new systems which we alluded to, which we think is the real strong up-side to this. As you go through it, you have customer and vendor saying "Well, does it go in this place? Is it the right spec? Does it have this feature?" So the spec for a system this broad isn't as detailed as the spec for a rescue truck, and as you're working through it, the customer and you may have different views on where it's going and what the exact application should be in a certain area. So there is no finger-pointing, it's certainly wasn't a case that we could not deliver. I can guarantee you that was not the case. But we had all of our product done, in fact, and that's why we mentioned the installation issue which has been delayed. So working through it with the customer is what caused that delay.

Okay, thank you.

Our next question comes from Walt Liptak, from McDonald Investments.

Hi, good morning. I guess going back to Larry's question: in the waste-management business, can you talk about what the size is, in total waste-management contract? It sounds like it was smaller in total to begin with, because of constraints with the net industry. Can you talk at all about what it looks like the total contract is?

Are you talking about a prospective contract?

No, about the contract for 2004 through 2006. If I recall, had about a $150 million, three year contract.

No, we cannot talk about that for two reasons, and I'm telling you straight out. One, we don't know. Two, waste management as our customer has told us that they don't want us talking about that.

Okay, fine. I want to understand the order trends in the FRG, the fire/rescue group. It sounds like there was a weakness which you may have alluded to this earlier, but a weakness in your European business, which I believe is . And it sounded from the press release that there was going to be a pickup coming or that you expect to pick up in coming quarters. Is that right?

One, it's close to right but let me clarify. It is not a weakness we're alluding to, it was a timing issue quarter-to-quarter. markets remain fairly good. As we've said all along in fire, but especially in , they sell a lot of multiple unit orders. (When we referred in fact to this Brazilian order.) And those will distort any given quarter. So that's what we were referring to. Overall market is okay.

So you're saying part of the year-over-year decline in FRG orders is due to this issue of timing, but excluding that, you're looking at okay. Fine. The other question is that of the other incoming orders, especially in North America, are you seeing a shift from the more custom truck to commercial, or shifts away from some of the aerial trucks?

I think, well yes clearly on aerials. That's been the whole point, when we're surprised. That's the point we've been trying to make: that our aerial markets were up through the first six months of the year, and they really fell off dramatically. And when I say "markets," let me be real specific on what I mean. I pointed out that our number of prospects has not changed. We're still working with them. Many more than we understood than we understood, or they understood, have deferred their buying. They deferred in the Q3, and we anticipate still seeing that in the Q4. So to the extent that there's a shift, it's because those customers haven't gone away but they have put off their buying. Our best understanding is that because these are the highest dollar purchases, the aerial units.

Okay, is there a shift between the custom chassis and the commercial chassis?

I think short-term, we generally see that, and it's not so much different now that we're going to see more commercials right now because they are on average, a lower priced unit. In these kinds of times, you will see municipalities going for the lower types of units. This is not unusual, for the past two recessions, while the numbers aren't exact, fundamentally this is what we see going on.

Okay. The Fire Act, can you attribute any of the ordering to the Fire Act? Is there an outlook for the 2004 spending?

I think very little that we've seen. I think one of the things that I understand from our folks, and they just came from a meeting of manufacturers who met with the FEMA people, one of the interesting things going on this year is the high level of money going for used equipment (and that's a fact) which would suggest that as they're granting that money, they're getting it to very small departments who have much less need for the types and equipments when they're supporting "used." So the "used" doesn't help the major manufacturers of the world. So right now, I think it's about a billion has been released for firefighting apparatus. Released, that doesn't mean that it's been spent by the receivers of that. We've had some benefit, not a lot.

The next part of your question referred to next year. Nothing's been budgeted that I'm aware of. I understand that the FEMA officials indicated that they expect to get at least the same amount of money authorized for next year, and that's the extent of our knowledge on the FEMA fire money.

Okay, thanks.

Thank you. Once again, ladies and gentlemen, if you have a question at this time, please press the 1 key on your touchtone telephone.

Our next question comes from James Sanders, from Standard's and Poor's.

Hi Joe, hi Stephanie. Quick question. You're referring to the federal funding being released to the municipalities. I guess my question involves more of if and when that money does get released. Number one, what kind of money are we talking about? And number two, what kind of discretion do the municipalities have in terms of spending it? Is it going to be on equipment? Or is it going to be on taking care of their budgets? Where are you feeling or seeing that this money is going to go?

I'll try to answer those part by part. With respect to the amount of money, it's the Homeland Security Act, and it was $4 billion or $3.6 billion that had been approved in Congress. So that's ballpark $3.6 billion, to perhaps $4 billion is what we're talking about in federal monies. That is separate from FEMA, which has money for front-line fire and police people. So there's two separate funds of money. That money is $750 million for this year. The one I was referring to is the Homeland Security bigger number, and that's what I referred to. I've met with the mayor of a fairly large municipality this week, I was talking to find out exactly what might be going on, and without getting into what city that might have been, they were indicating that they have projects that they started investing in, and they can't get the money to flow. It appears that the Homeland Security money is flowing through the states, down to cities rather than directly to the cities, and that perhaps is what's causing the slowdown. But it's not earmarked for a specific project, which the FEMA money is. The FEMA $750 million are fairly specific, the Homeland Security money can have broader uses. So that's what we know. It's a very large amount of money, and as it flows to the cities it should have a benefit. We're not suggesting that it will offset all the weakness, we don't know that answer but we certainly know that it will help. And our customers are telling us that.

Okay, so I guess that the follow-up to that is: is any of that reflected in your orders? I mean, you're saying that they have projects, but have they ordered stuff from you yet? Or is it just bidding right now?

Now, what's going on right now is that they are diverting funds to projects other than our equipment.

Oh, got it. Okay, that helps. The second question is: Stephanie, you mentioned $58 million operating cash flow, and you said that there was a $10 million pension cash payment, is that $58 million net of that or before that?

It's $58 million which is year-to-date, and the pension contribution was $4 million for the quarter, and it is net of that.

And the final question that I had was regarding the money usage for the cash you're going to get because of the dividend cut. Is there a priority there? I know you mentioned strengthening the balance sheet and diverting it to other areas. What's the priority there, or is it 50/50?

I don't think there's one that's more prior than the other. We're in fairly good debt position right now. Our major use of cash has been the investment in the business. So if we find those investments, if we have the products, if we have the capital investment opportunities, that's the #1 priority. Invest and grow this business. The #2 priority is to strengthen our balance sheet so that if markets come back, we perhaps have a little more powder in our keg.

Okay, great. Thanks.

Thank you. Once again, ladies and gentlemen, if you have a question at this time, please press the 1 key on your touchtone telephone.

Mr. Ross, there are no further questions in the queue at this time. I'd like to turn the program over back to you.

Okay, thank you for joining us. Not good news and we're not happy about that either, but we intended to do something different with it. We do have a lot of things going here, and we hope to be able to come back in January and talk more about those. And thanks again.

Thank you ladies and gentlemen for your participation in today's conference. This does conclude the program, you can now disconnect.