Federal Signal Corp (FSS) 2004 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter earnings release 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 today's conference, please press star then 0 on your touch-tone telephone. And as a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, CFO, Ms. Stephanie Kushner. Ms. Kushner, you may begin your call.

Good afternoon and welcome.

I'm start the calling with a reminder that some of our comments contain forward-looking statements about the future prospects of Federal Signal, so please refer to our latest annual report to shareholders, our recent SEC filings and the press release that we issued in conjunction with this conference call for a more detailed discussion of the risks that are involved in these forward-looking statements. The press release is available on our website under federalsignal.com, and now I'll just turn it over to Bob for his initial comments.

Thanks, Stephanie, and good afternoon, everyone, and thank you for joining our conference call. I'm going to start by updating you on the trends we see in the market place and make some brief comments about our 4 operating groups. Then Stephanie will give you a little bit more insight into the numbers for the quarter, and for the half year, through June. And finally, I'll conclude with an update on the restructuring plan we announced on June 30th.

Let me start with our overall results for the second quarter. As you have seen in our press release, we experience a slight decline in revenue for the quarter and for the first half, compared to corresponding periods last year. Most of the fall off is attributable to our Fire Rescue group. In regard to profitability, it goes without saying that we're not happy. You can see we are still struggling in Fire Rescue, and we have some issues in Environmental Products and Safety Products. We'll go into more detail later, but I'll simply state at the onset that the problem in Environmental is our refuse truck business, and the decline is Safety is virtually all related to our parking business.

One of the more favorable trend this quarter was new business bookings. Orders increased across our domestic market segments, municipal government, and industrial commercial. We also experienced significantly increased orders from non-U.S. customers. Orders in the domestic municipal government market were up 7% from the same quarter last year, and up 17% from the first quarter of this year. We see strength pretty much across the board, which gives us some solid indication that municipal spending is now recovering. On the domestic industrial commercial side, we were up 2% from the second quarter of last year. We characterize these markets as growing, but somewhat more slowly than earlier in the year. Excluding refuse, we have seen this segment grow in each of the last 4 quarters.

Demand outside of the U.S. continues to grow in virtually all of our product lines. Helping this in the second quarter was an order for $13 millions worth of fire and rescue trucks for Iraq. But even excluding this one order, our non-U.S. orders were up over 9% from the second quarter of last year. For the first half, 34% of our new orders are non-U.S., compared to 30% the year before. Only about a quarter of this growth is due to favorable currency exchange rates.

I'll now get into details by our 4 business groups, and we'll start with the Tool Group first this time. Global sales for the quarter were up 9%. Domestic new business increased 13% over the second quarter of last year, continuing the nice recovery. Orders were down a little from the first quarter of this year, but we believe that was due to an anomaly we say with lower new business levels in May. Non-U.S. sales for the Tool Group declined in the second quarter, but were still up 8% for the first half of the year.

Europe has been very weak in the first half, and we expect it to continue for the rest of the year to be weak. Much of our business there is derived from the automotive industry, where automakers have delayed some of their projects because of profit pressures. In spite of weakness in Europe, the Tool Group continues to do well by lowering their fixed costs in Europe, and efficiently converting additional domestic sales into income. Work is well underway to transfer production out of a small operation in France into the operation in Portugal which opened in 2003. We will have that completed as planned by the end of this year.

Moving on to our Safety Products Group. New business was up 5% compared to last year Q2, despite continuing weakness in our parking business. Excluding parking systems, our other lines were up 11% for the quarter, with momentum building for larger projects in our outdoor warnings systems business, in particular for domestic nuclear and military installations. It was a good quarter for new business for police lights and sirens in Europe as we continue to gain share in countries where we haven't had strength in the past. The bombing in Madrid brought the real threat of terrorism in European countries to light, so we expect to gain from general market growth in the coming years. In addition, last week we received our first order for a SCADA system to monitor a municipal water treatment facility. SCADA stands for Supervisory Control And Data Acquisition, and we believe the market for these systems will continue to provide significant growth opportunities in the coming years. Our system monitors various process parameters and sends a signal to a central control station, and can also be routed to a cellphone, pager, or e-mail in the event of a problem. The technology evolved from our work in outdoor warning systems, and is a natural pipeline extension that we can grow with customers that already know us very well. The technology can be applied to any kind of continuous process that needs to be monitored but doesn't justify on-site 24/7 human interaction.

As I indicated before, new orders for our parking business have been disappointing all year. We're not losing business to the competition, but rather continued project delays are lengthening the sales cycle, and the DFW project is now winding down, and that affects the comparison. However, we expect that two large domestic airport projects will finally be tendered in the third and fourth quarters this year. We believe that we're well positioned to be able to land these projects for 2 primary reasons: first, we have a great opportunity to leverage the technology we developed for the Dallas-Ft. Worth installation, so we represent the low-risk choice for major airport projects throughout the world. And, second, we have established ourselves as the leader in these large scale integration projects and we intend to maintain our position by continually raising the bar in terms of functionality and robustness. In many regards, the large airport parking projects parallel the SCADA projects in that we are integrating a network of sensors and actuators with software to manage a comprehensive system. These integrated systems improve productivity and address the need for increased monitoring and diligence in a world that is increasingly focused on protecting citizens and installations against terrorism.

Let's move on to the Environmental Products Group. Sales were 8% higher in the quarter compared to last year, but income declined. The two primary contributors were the impact of steel price increases and currency exchange rates. The impact of increased steel and transportation costs and currency exchange on this group amounted to about $4 million for the quarter, most of that coming from steel. I'll talk more later about the broader impact of steel prices on our Company. In regard to currency, we are experiencing this year the adverse impact of the stronger Canadian dollar on our production costs in Canada. The strengthening happened primarily in late 2002, but the impact on our earnings lagged because we routinely hedge our exposure out a year or more. New business for the Environmental Products Group in the municipal government segment was up 8% from the second quarter of last year, and up 5% year-to-date. Recall that in Q1 we still weren't seeing solid strength in the municipal segment within this group, so we're excited to see some good solid gains in this quarter. Orders for our Vactor sewer cleaning trucks were up nicely, and refuse trucks were also showing good strength, up 16% for the first half.

Refuse was up sharply in Q1, then down a little in Q2. We believe due to the timing of our first price increase which was phased in during April and May. New business on the industrial side of this group leveled off overall, but demand for Guzzler vacuum trucks continues to be very strong. Concealing this strength within the group is the reduction in front loading refuse trucks, as expected, due to a smaller contract this year with waste management. International new business for the group continues to strengthen. Up near 40% this quarter, which is similar to the year over year improvement we saw in the first quarter. Outside of refuse, non-U.S. orders for all of our key product lines in the group were up, reflecting the great strength of these brands around the world. Non-U.S. orders amounted to 22% of the group's new business in Q2, up from 17% last year Q2. Further to the increased domestic demand for our refuse trucks, recall that we had hoped to offset lost sales to waste management through a combination of a general market recovery and increasing our share through our dealer channel. We still project that we will accomplish this for the year on a unit basis. However, we won't be able to maintain equality on a revenue basis since the increased volume is primarily from lower priced rear loaded trucks.

Without waste management, orders for refuse trucks in the first half of this year were up 33% over the previous six-month period. We rolled out our improved automated side loader in the first quarter this year with 10 machines placed into service with a commercial hauler. We're very pleased with the field performance so far, and we believe we now have the market leading platform for this segment, and this segment will be glowing steadily over the next years. Industry analysts believe the refuse truck market will grow significantly in 2005 as the large haulers get back into replacement mode, and municipal revenues revenues recover. We're well positioned, with updated offerings in all three segments of the business to take advantage of improving opportunities. We still have a lot of heavy lifting to do as we consolidate our operations and get our fixed cost structure in shape, but we expect to have this essentially completed by the end of Q1, 2005.

We've had some success in our recruitment activity for this business. Two week ago our new VP of Sales and Marketing started with us, bringing with him 17 years experience in the weight collection and disposal industry. We've not been successful so far in recruiting a general manager, but that remains a top priority for us. In the meantime, Mark Webber [ph], the group president, is running the operation directly, as the team begins implementation of our consolidation plan.

Now let's will move on to our Fire Rescue Group. We had a strong quarter for new business, up 17% from last year, and up 11% for the half compared to last year. The $13 million Iraqi order accounts for the principal portion of the improvement for the quarter. Our international new business represented a 50% of the total in the first half, compared to 27% last year. In addition to the Iraqi order, demand for our Bronto aerial units, and All-Rounder [ph] fire trucks continues to grow in European markets. Bronto European orders more than tripled in the first half, which more than offset the reduction in Latin America, where a singular large Brazilian order boosted results in 2003.

Domestically, our municipal orders were still weak through the second quarter, although bid activity has picked up nicely during the past several weeks, which we believe now is an indication of recovery. Industry data released recently by FAMA only covers through the end of 2003, and it indicates that '03 was down 11% over '02. Gratifying to see was that our market share increased from 2002, up over a percentage point on a unit basis. Data for Q1 2004 is due out any day, and we expect to so that we're holding on to the gains. Looking ahead, with the changes we're making to our stainless steel product line as we prepare to relocate production to our Ocala, Florida plant, we expect to lose about a point of share during the interim as we temporarily reduce the scope of our offerings, but our intention is to get it back in subsequent years as we expand our offerings under a new structure. Looking at revenue within FRG, it was down 14% for the quarter. Had we been able to ship the trucks during June that we forecasted at the beginning of the month for our Ocala, Florida plant, revenue for the quarter would have been about equal to last year Q2, which was one of our best sales quarter ever. Not getting the trucks out, of course remains our biggest challenge.

You will recall we fell far short in Q1, and expected to make most of the it up in Q2, but we didn't do as well as we expected, or as well as we should have been able to do. The Ocala problems were not the only issue impacting our Q2 results. During the first quarter we stopped shipping airport units for a large order from our European operation due to some powertrain problems. The solution has been found, and we began shipping again this month. This would have added another $3.5 million in revenue in Q2 had we not encountered this problem.

Returning to the issues at Ocala. It became increasingly apparent during the quarter that in spite of extraordinary efforts by our employees, the course we were on was not getting us a enough traction, and improvement was not coming fast enough. We've made a leadership change, and I've taken charge of day-to-day operations until we can identify the right person to lead this group into the future. I was comfortable with a vision, and the initiatives that were under way by the former president and his team. There's a broad array of issues the business has struggled with over a number of years, and they were trying to get their arms around it. The direction was not wrong, but I recognize that the scope of the improvement activities needed to be narrowed and focused on those that are the most important and in the right sequence. We've since made a number of changes that have the organization focused intensely on smoothing production flow. Our employees are contributing an impressive level of energy and enthusiasm to this drive, which they've termed Getting Back To Basics. I've learned over the years that you can't effectively improve a process that is not stable, and I'm afraid that we spent too much time in recent months try to do just that. We're going to get the flow stable, steady, and predictable, then we'll improve it.

Another major thrust is to accelerate progress in implementing our configurator. After heading down a couple of blind alleys along the way, we've now settled on the best solution, and will begin rolling out the first models with the commercial configurator tools in late August. By the end of this year, we will have about 55% of our volume covered and be at about 80% by the end of next year. This is faster that than I reported last time, and we will end up with a much better tool that our dealers will find extremely easy to use. Income wise, in the Fire Group, our shortfall this quarter compared to prior year was due mostly to lower volume and a little bit of mix. Other contributors were material price increases of about $600,000, and increased warranty expenses of nearly $1 million. Most of the additional warranty expense is due to some problems with a large fleet that was sold about 3 years ago, where we provided some exceptional long-term warranty provisions. Reserves established at the time were insufficient in view of the additional exposure, and the fact that the trucks are experiencing a problem that was unexpected. We do not expect these problems to occur in other vehicles that we've sold.

The U.S. Ocala operation was not the only issue impacting our Q2 results. As I said, our shipments that we stopped out of our European operation also had an impact. As I've said before, the problems in our Fire Rescue group, and primarily at our main plant in Ocala, or quite simple to understand, and I have no doubt that we'll get our arms around them. I've said that will take some time, but we should start to see improvements during 2004. Frankly, I would have liked to have had more solid evidence at the halfway point than what we have, but I know we can do better, and I know we will.

Let me take a moment to comment about how steel price increases have affected our business. In the Q1 conference call, I stated that we expected the full year impact of rising steel prices to be about $8 million, with an estimated $6 million recovered by the end of the year through our own price increases. At the time we thought steel prices had peaked, and would begin to moderate somewhat. The number I gave you would have been the impact if prices hadn't declined at all from that point. However, we've seen another round of steel price increases, particularly during the past several weeks. Instead of the 30% premium we had built into our assumption, commodity indexes are now up 50 to 60%. Accordingly, we are instituting another round of price increase in the product lines that are impacted. Unfortunately, we still have the lag between when we see the increases coming in, and when our counteractions become effective. All of the pricing adjustments we made earlier in the year stuck nicely. And we expect this round to as well, because all of our competitors are facing the same problem. We're now projecting the impact to Federal Signal to be about $10 million for the year, with recovery during the remainder of the year about 6.5 to 7 million. We haven't experienced any of the feared shortages in steel, but the burgeoning demand in the heavy truck and industrial equipment markets, with that, shortages are popping up in truck chassis, engines, transmissions, and some high strength steel grades, and lead times are growing. So far the problems haven't been significant, but I'd have to say that there's some risk for the remainder of the year if demand continues to grow in these segments.

So at this point, I'll turn the call over to Stephanie, and she'll give you an update on the financial results

Thanks Bob.

First, let me just go through our one-time restructuring and loss on divestiture charges in the quarter, because I know the accounting is maybe a little confusing. During the quarter, we incurred more than two-thirds of the restructuring costs and losses on divestitures that we announced on June 30th. As you will recall, we announced a total estimated after tax loss of $20.1 million, of which $12.9 million was incurred this quarter. These losses show up on 3 lines of the income statement. We recorded the initial largely non-cash asset impairment charges associated with the closure of Preble, the curtailment of manufacturing in Dayton, France, and the tentative decision to close our Oshkosh, Wisconsin, refuse body plant. These charges totals $8.1 million before tax, and $5.6 million after tax.

In addition, we recorded a $2.9 million after tax loss on the sale of our 30% joint venture interest in Safety Storage, an investment in a modestly unprofitable business in which we've been involved since 1999, and that loss is included in other expense. And thirdly, we recorded a $4.4 million loss associated with the divestiture of our majority interest in Plastisol, and that loss is included in discontinued operations. So the net effect of this charges was to reduce our operating earnings by 18 cents per share, and lower our net income including discontinued operations by 27 cents a share. We believe our June 30th estimated total charge of just over $20 million, or 42 cents per share, remains accurate, so we've booked about two-thirds of the total charges. Most of the rest of those charges will be incurred in the second half of the year as we take in the actions, and somewhere in the range of 1 to $2 million may be carried forward into 2005.

Now let me talk about the operations financials. For the corporation, our backlog increased 3% during the quarter. Our quarter-end backlog by group for Environmental Products was $83.3 million, which is down about 5% from last quarter. For Fire Rescue, $271.6 million, which is up 4%. Safety Products, $38.6 million. That's up about 15%. And Tools, $10.4 million, for a total of $404 million. Our foreign currency effects year-over-year were modest. Our sales figure of $304 million benefited about 1.5%, or $4.5 million from the -- mainly from the stronger Euro. The euro was about 7% higher, quarter-over-quarter. The impact on our operating income was minimal, about 3/10 of a cent per share for the quarter, and about 1 cent per share year-to-date.

Our gross profit margin declined to 23.5%, which was down from 27% in the same quarter of last year. The decline was mainly due to the weak operating results in Ocala, and also in our refuse businesses. Our selling, general, and admin expenses as a percent of sales totaled 19.2%, an improvement from the 20.1% in last year's second quarter, and that's due mainly to staffing reductions that were implemented during 2003, which is being partially offset by some higher legal and audit expenses in corporate. The corporate expense portion of SG&A was $4.7 million, up from $3.7 million last year. We had predicted this, the increase was associated with the additional legal fees to defend a hearing loss litigation, and also the internal and external audit expenses associated with the Sarbanes-Oxley section 404 internal and external audit requirements.

Our reported effective tax rate was a relatively typical 28% during the quarter. If you exclude the restructuring, the tax rate would have been 21%. That's still low versus what is more normal for us, a mid- to upper-20% range, but that's because of our relatively lower earnings. Now, a few comments on the balance sheet and cash flow. Our operating cash flow was negative in the quarter, and is now at a negative $8.1 million for the half. As you'll see in the press release, increased working capital needs have used $26.5 million thus far this year. Both our inventories and receivables are up from year end. The increase in receivables merely reflects the timing of shipments, because in fact our net day sales outstanding was under 50 days at the end of this quarter, which is where they were at the end of the year, at the end of 2003. The increase in inventories is primarily in Fire Rescue, which is up about $23 million from the end of the year, half of which is in Ocala, mainly due to higher work and process inventories. The balance is in Bronto and then E1 Europe, the large project that Bob referenced. Both of these should decline fairly significantly in the the second half of the year.

The high working capital balance reflects payment timing on some large contracts and also the operating problems in our Fire Rescue group, particularly Ocala. We do expect a $26 million year-to-date increase in working capital to reduce itself, to be at or below 0 between now and year end. Our capital spending was $6.7 million in the quarter, bringing spending for the half to $11 million, and we expect spending to be slightly higher in the second half, which is typical for us, and to be about equal to depreciation, which is about $24 million for the year. At the end of the quarter, the ratio of manufacturing debt to capitalization rose to 43%. With manufacturing debt up $292 million, up from $268 million last year. This time last year we were at 41% debt to capitalization.

As we stated during our conference call on July 1st, to facilitate the restructuring activities, we renegotiated our committed bank credit facility so that the restructuring charges and non-cash asset sale losses would be excluded from our minimum interest coverage covenant, and that minimum coverage ratio has been reduced from 3.0 to 2.5. At the same time, we've reduced the size of the facility to $200 million. Given our near-terms focus on shrink to grow, we saw no need to retain the full facility size. At the end of the quarter, we had $100 million drawn on the line, and we were in full compliance with our debt covenants.

Now I'll turn it back to Bob for an update on our restructuring projects.

Thanks, Stephanie.

These comments relate back to the announcement that we had on June 30th and conference call on July 1st. All 7 transactions that we disclosed are completed or are otherwise on track. We closed on the Plastisol holdings divestiture last Friday, the Kelowna production site also closed on Friday. Divestiture of our holdings in Safety Storage closed on June 28th, and our leasing portfolio divestiture closed on July 9th. In all cases, the proceeds were essentially as we announced.

In regard to plant consolidations. Discussions are under way with the UAW in regard to our tentative plan to close the Oshkosh, Wisconsin refuse truck plant. The Dayton progress French plant phase down is underway, and our plan for closing down our Fire Rescue plant in Preble, New York has been initiated. We've retain the services of outside companies that specialize in operations to assist us in these consolidations, and to help us implement efficiency gains as we transfer the product lines in both the refuse and Fire Rescue operations.

One more comment as we draw to a close here. As I said on earlier conference calls, the issues that we're dealing with will take some time to fix. The length of time it will take us to solve our issues is directly related to the size and scope of the problems. Problems which did not arise overnight, and therefore cannot be fixed overnight. Accordingly, we do not expect an instant recovery in terms of our financial results. Although we are pleased with much of our progress, we know we have a long way to go. We expect to complete the first phase is of our plan, the Shrink To Grow phase by mid-2005, and though we are not providing financial guidance at this point, it can be reasonably estimated that our financial results will not significantly improve until at least the latter half of 2005, more likely early 2006. It is our hope that we will be in a position to provide guidance for 2005 by the end of this year.

But let me make this clear. We must first stabilize the situation that we have in our Fire Rescue business before we can accurately predict revenue and earnings. We're getting better in our other groups, but until we can predict Fire Rescue results, we can't provide useful brackets. We feel strongly that if we execute our restructuring plan well, even though it may not generate strong results in the near term, we will ultimately be in the best position to generate long-terms shareholder value. Fixing our problems at the source demands visions and patience, and we remain confident that we're taking the right steps to make our company stronger and more profitable next year and into the future years.

With that, we'll now open the call up to take your questions. Lamont, please take over.

[Caller Instructions]. Our first question comes from David Gold from Sidoti & Company.

Hey, good afternoon. It's Sidoti & Company. Just -- Bob, if you could, a little bit more color and the issues I guess during this past quarter in Fire Rescue. First off, I guess the stoppage of -- the delay there, would you attribute that, and you know, I guess there were some issues on the inventory side, as you mentioned. Would you attribute that more towards planning issues, or sort of assembly issues, or outside issues where there were supplies but you just couldn't get your hands on them?

Very little of it was due to outsiders. Most of the problems we've created ourself. It's more of what the business has been struggling with for some time. The way -- this a very highly customized product line. Most of these vehicles are kind of one off vehicles, and we didn't have an effective way of structuring the ordering process to end up with the vehicle that we had sufficient engineering behind it. Such that we could accurately generate a bill of material, and get on with procuring the parts for the truck.

The way this occurs, each order that comes in is essentially a new order, and our engineering department goes through and assesses what new features or components need to be designed, and go through the process and generate a new bill of material for each truck. Most of our problems lie in the fact that the -- there are errors in the bill of material. A secondary source of problems is the fact that we may have the right part, but we don't have the sufficient information for the floor to know how to install it, or there are interference issues between subsystems or components. So it has to do with the front of the process, where the order that we accept from the customer is something that we have a firm grasp on what is required in terms of components to order, and in terms of information to provide the shop floor.

Okay. And sort of a -- I know you commented that we're probably at least a year out from seeing things pick up sort of company-wide. Can that be interpreted to mean that you think that we're probably a year away and from seeing more normalized margins in the Fire Rescue business?

Well, it depends on what you mean by normalized margins in the Fire Rescue business. Historically, I guess, in the last several years we've been in an area of 4 to 5%. We need to be in the area of 9 to 10%. Now, we're not going to get there in a year. But in a a year, what we -- where we need to be is a very stable production system where we get the trucks out on time every time, where we understand, have a full -- or a very good understanding of what our costs are going into it. And -- and we can fulfill our commitments to our customers, and earn an adequate margin.

So is that to say a year could be the 4 or 5%?

Yeah, that's what I would say is our starting. We get back to where we have been before, very stable, very predictable, and then we improve from there. So it would certainly be my hope that by the end of 2005, that we're -- that we're in that kind of position.

Gotcha. Very good. Thanks so much.

The next question comes from Walt Liptak from McDonalds.

Hi, thanks. You know, with regard to, I guess, not giving -- I guess, the outlook or the lack of the outlook. You know, 13 cents for the quarter, is that excluding charges? Is that that kind of a run rate that we should be thinking of until we get out a year, or would the improving economy suggest that you can do better than that?

Well, the 13 cents includes almost break even in Fire Rescue for the quarter, so clearly, you know, we ought to able to do better than that. Beyond that, we have some price increases that are coming into effect as we speak, in late second quarter, for Fire -- for Refuse and our Environmental Products business, and in June, May/June for fire business. So we have that going on. We also have steel price increases that are going to continue to get worse.

Okay. You're not giving guidance, so it's probably not a fair question.

You mention that you're doing things in Ocala, Florida, to improve the predictability of the business, and I presume by that you mean that you're running interferences where parts don't fit on to trucks, on the assembly is impossible to do. What kind of things are you doing in terms of training, I guess outside of the configurator to improve in the process flow?

The configurator will help us down the road, but in the meantime, we just have to find ways of gutting it out. But I just look at this as Manufacturing 101. As I looked at our performance, and I went back over the last three and a half years, and looked at how many units that we got out of Ocala by month, what was clear is that at the third month of every quarter, we go through heroics and get out an extraordinary number of trucks, and in the couple of months prior to the last month of the quarter, we do very little, and that's been going on for some time. So we have this culture in our company that -- and I don't want to make it sound this minimal, or this trite, but the fact is we don't work real hard in the first couple of months, or we're not focused on getting trucks out, at least in the first couple of months, and then try to make it up for it in the third month.

You can't have a business like that. You can't run a manufacturing operation like that. So what we're doing, we're just focusing on every week we have a number vehicles that we want to start every week, and a number that we want to finish every week, and that's the same number. Obviously not the same trucks. So it's just getting back to reporting every day on did we start the body build on the day that we said we were going to start it? Did we start the chassis build. Did we start the door build? And on each step of the process, did we get to where we wanted to be by the end of the week?

After this conference call, I'm heading back to Florida, and I'm going to spend the entire month of August there, and probably the entire month of September. And I will be personally reviewing these reports on a daily basis and a weekly basis. And we've geared the organization up now to figure out what it takes to be able to start them all on time and to finish them all on time. Now, if we're missing a part, then obviously that alone doesn't help things. So whenever we have to stop a truck, for whatever reason, there's a root cause analysis, and a corrective action process, formal. If someone wants to move a truck in the schedule, they have to have my permission. I'm going to go out on the line, by that truck, assemble the appropriate people, and figure out why we missed it.

So it's just getting back down to focus and accountability. And I think that we just haven't -- we -- you know, the management team has been doing a marvelous job doing a lot of things. But I think until we get the production flow smooth and predictable, the other things don't matter. And so we're just putting extraordinary effort on this.

Okay.

Same time, you know, that's the short term. The long term requires the implementation of an extremely effective configurator tool, which we are now pursuing very aggressively, but that effectiveness, really because of the long lead times of the trucks and so on, we're talking into next year before that thing begins to help us.

Okay. Great. And then what's your time frame, I guess, on finding a leader down in Ocala, Florida, and is there a sector or an industry that you would be looking to to find a person from?

Well, as soon as possible is the first answer, but we're not going to compromise. There have been a lot of leadership changes at Ocala over the last 5 years, and we've got to stop doing that. We have to create some stability and someone who our employees are eager to work for in the future, and eager to follow a vision. So I'll take whatever time is required to find that person.

I described the ideal person -- I guess we didn't have a conference call after that one, but with our dealers. Ideally this person -- well, first of all, they have to have operations background. Not that they've spent their whole life in manufacturing, I don't want that, but I do want someone that knows what's going on in operations so that he or she can accurately assess whether the leaders that they have in production are the right ones. The person has to have had considerable P&L experience, someone who respects the art of making money, and -- ideally, this would be someone who is experienced in the fire industry. Now, I've described 2 or 3 people in the world, and so we're likely to not get all of those, but if we can't find someone that's steeped in the fire industry, then a similar industry would -- like heavy-duty trucks or industrial -- highly customized industrial type of equipment, those kinds of things would also fit very well.

Okay. Good. Okay. Thanks very much.

Thank you, Walt.

Our next question comes from Jack Kelly from Goldman Sachs.

Good afternoon, Bob.

Hi, Jack.

On the Ocala facility, can you just talk about maybe just about the long term, and the configurator that was originally designed sounds like it's now inadequate, but I thought that we were going to be under the old Configurator 25% of the trucks that were delivered in the June quarter, maybe it's been thrown off by production delays, but I thought 25% of the trucks in the June quarter were going going to be under the, kind of, the old Configurator. Did we see any positive signs of that at least being partially successful, and then also, could you distinguish between the old configurator and the new configurator, if that's the right way to put it?

Sure. First of all, the old configurator. We rolled it out in February time frame, we were a little later than we thought, but basically that was rolled out for 2 of our models, and those 2 models were basically our Tradition line, which is a commercial chassis, very simple, very few options, and the next one was our Signature 300 line, which is a custom chassis, our own chassis, but a pumper with, again, very few options. So we were cutting our teeth on the simplest trucks. Well, and that did roll out. Trucks that we are now starting to build at this time have been configured under those. However, those weren't a problem anyhow. So we're not going to learn too much from that.

The -- what that was, Jack, is that was a configurator that we were developing ourselves. In other words we were in the software development business, and that's one of the things that we changed some months ago. We -- we stopped that, although we did -- have rolled out in two models, and we chose one of the commercial, commercially available configurator tools that we are now implementing. And this commercially available configurator tool has been under development and in use for some 15 years. It's a very effective tool, and actually easier to implement that the one that we were doing ourselves. So let me -- so the configurator that -- the commercial Configurator interfaces seamlessly with the von ERP [ph] system that we have. It is more gooey [ph] interfaced than the one that we were doing, had no graphical user interphase at all, and we were able to attach photographs of different options and so on much easier. And the way that a dealer goes through this thing is much more intuitive. You can start anywhere you want and go any which direction. You don't have to do it in a presubscribed sequence.

You can -- you configure a vehicle with one chassis, and then just with a couple clicks of a button look to see what a different chassis would mean in terms of the option availability and costs. And also this thing then directly -- the specifications or the configuration -- vehicle configuration dumps down back into von, and then we generate bills and materials and routings right from that, so the amount of human interaction and manipulation with the data is substantially reduced. So in every sense of the word, it's just -- it was the right solution. It just took us a while to get there.

So the problem with the old configurator which will be eliminated by the commercial version, is that the -- after the engineers designed the truck, for some reason certain parts are were not being ordered?

Yeah. In the current -- in the current process. You know, the sales guy started with a few sheets of paper, then had a basic truck on it. If you were looking for a -- let's say a -- a custom pumper, it had a custom pumper specified, but then it didn't have any guidance for the salesmen or the customer to use to determine what other options that they wanted on the truck. So all of that was done basically on the back of a napkin. So there was no structure to the conversation for our dealer to assist the customer into making good choices, and good choices in terms of the trade-off between, you know, functionality and pizzazz and cost, to make those choices while this conversation was going on. So the -- the basic specification sheet along with the napkins all went to the plant, and our guys had to try to figure out what in fact the customer wanted and so on, so the process was just, you know, archaic, is a -- is a complimentary term to use for it.

Can we talk about the Environmental? Ex refuse, what were margins doing ex the refuse business in Environmental? What did they do in the quarter?

Okay.

Excluding refuse our margins were strong. They were actually at least comparable a little higher than last year, because we are getting strength on the industrial side of the business.

We did have some impact in steel on those products as well, not nearly to the extent of refuse, but nonetheless.

So ex refuse, margins were up year to year in Environmental?

That's right.

Okay. And then I guess just in terms of the tools -- excuse me, then, yeah, just on parking, Bob, you mentioned 2 contracts might be coming up in the third and fourth quarters. I guess just kind of brings to mind, was the Dallas contract a profitable one for you? I mean you get these big lumpy businesses and it takes a while to get them, but sometimes the profitability isn't there. Did you execute well on that, and was it a profitable contract?

I think the profit on the contract, Jack, it is not yet complete. We're still in testing stage. I think the level of profitability is good, but I have to say the timing on receiving the payments has been slower than expected. So as we move into more of an EV type world, I would say probably the economic value on it is less than we would have expected.

Okay. And then finally, in terms of free cash flow. You had mentioned the working capital drain of 26 million should be eliminated by the end of the year. Where do you think that puts you in terms of free cash flow for the year? And that would be, you know, at the $26 million positive. You had talked a little bit about capital spending, but can you give us some sense of where free cash flow might end up this year?

It's a little awkward without providing an earnings estimate, so --

Okay.

Yeah, I think I'll take a pass on that.

Okay. Fine. Thank you.

The next question comes from Evan Goodman from Salomon.

Good afternoon. I just wanted to clarify a few things. One is just to make sure that I understood that what you said about the working capital. Were you saying that the -- I believe it was $26 million hit year-to-date will be reversed by the end of the year?

That's correct.

So on a full year basis, you're looking at working capital being --

Either neutral or slightly -- or contributing slightly positively to our cash flow.

Terrific. And in terms of your pension, you've made all your contributions, your cash contributions for this year, is that correct?

That's right. We don't have any other planned contributions this year.

Okay. And how about for next year?

We -- you know, we remain underfunded by -- I think the last time I looked, about 18%, so we will have a contribution next year. Now we are trying to do those on a voluntary basis and stage them so that we're in a much better funding position over the longer term.

And do you suspect that that would be comparable to what you funded this year?

So much moves around in terms of funding requirements, et cetera, bit think that's a good starting point.

Okay. Terrific. And in term of your availability under your revolver, where does that stand at this point?

We have a $200 million line, and it was $100 million drawn.

So nothing has changed since the end of the quarter?

Well, our cash situation changes every day, but --

I mean has it changed dramatically?

No.

Okay. Terrific. And the last question, and I know you mentioned it, but we missed it. What was the change in the minimum interest coverage, and what precipitated that, please?

It was reduced from 3 times -- sorry, earnings pretax to earnings relative to interest from 3 times to 2.5, and that was a request we made, you know, of the banks for the next year or so, because were getting close to that 3.0.

It was a request that you made, or the banks made?

It was a request that we made.

Okay. I'm sorry, and that's attached just to the minimum interest that -- your minimum interest coverage. Okay. Perfect. Thank you very much.

Uh-huh.

Our next question comes from Charles Nuser [ph] from Reich & Tang.

Hi. First of all, thank you for spending a little more time on the other business segments, and giving us a little more insight into the new products and other things that are going on there, security and environmental. But of course like everybody else, I'll get back to the Fire Rescue.

I don't want to -- you to think I'm trying to back you into a corner, and I know you don't want to come out with firm numbers at the point, but it doesn't -- I still don't quite understand why if in the recent past, before you got there, the Fire Rescue business was in it's haphazard way generating 4 or 5% operating margins, and you've come on the scene and done -- or made some beneficial contribution, why that can't -- why that isn't a minimal level of expectation going forward? You know, getting from there to the magic 10% number, I can see where that's going to take some time and some effort, but what am I missing there?

Well, why wife keeps asking me that too, Charlie. Obviously, I spend a lot of time trying to understand what's going on there, but if you look at the first quarter of this year, our revenue was lower than maybe it has ever been. I'm not sure. But very, very low. And on that one, we got out about, if I recall, 20 trucks less than what we had expected to. And that was due to a couple of things.

One was the -- the trucks that we start -- or finish in the first quarter would have normally have been new business that we got in late second quarter of the previous year, or third quarter, and our new business during those 2 quarters was very soft at the time. We had a barn buster month in December, and so one of the problems that the guys had in that the first quarter is they tried to pull ahead some of those simple trucks and to fill production slots in the first quarter, and the second thing is there was an emissions change and so beginning in January, there were new engines that didn't work very well, in some cases, there were some stumbling problems with the engines. We had electronic control problems with the engines, we had wiring harness problems with the engines, so a variety of issues that really caused the first quarter to miss.

In the second quarter, you know, we should have gotten these trucks out, Charlie. The quarter developed like the previous -- like I described before. We didn't do much in the first month, did a little more in the second month, and in the third month, we tried to catch up, and we didn't do it.

Uh-huh.

Now, so again, as we looked a it, if -- comparing to the second quarter of last year, if we would have gotten the forecast out for Ocala, it would have matched the revenue of last year, and for the most part, it would have matched the income.

Right.

Now, there are a couple of other things that are going on, there are extraordinary things every month, but in this case I talked about the material cost of about 600,000 -- most of that was Ocala, and the warranty, about $1 million. So if you wrap all of those things I up, we would have done about what we've always been doing, but it has to do with -- with us being able to -- as you can imagine, when you're going through a production process and you have trucks started on the line, and you have to stop them and roll them off and bring some other ones on in advance, the effect that this has, the indirect labor costs and the indirect -- the number of people that it takes to manage something like that. We actually got a little worse in that regard in -- for the whole first half of this year than we were previous years. So I can't -- that's the only explanation I have. Instead of getting better, we not a little worse.

But it sounds like you just said really that so long as the orders keep up and you don't have the negative operating leverage from less business, like you had in the first quarter, whenever, and I guess you said that December was a big order month, which should be rolling into production in the second half of this year --

Yeah, we have a nice backlog.

-- then, you know, I again, without putting words in your mouth, you know, there's no reason why the prior 4 to 5% mediocre limp along level of profitability should not be doable?

No, there's not.

So it's more a question of getting from there to the potential 8-10 plus% a year from now as you continue to make progress.

Well, not 8-10 a year from now, but thanks anyway, Charlie. No, what's important is that to get it -- if we can take the same level of business that we've enjoyed in the past, where we've been able to do 4 or 5%, and do that in a stable, predictable smooth smooth flow environment, then that automatically is going to give you some -- some margin points. So, you know, to have this -- to have it completely smooth, and with the -- with very few problems, by the time the configurator is out and is having an impact an everything, you know, that's into 2006.

Fair enough. Fair enough. Good. Thanks.

Okay, Charlie.

Showing no further questions in queue, sir.

Okay. Well, if there are no more more questions, we appreciate everyone's attention, and we take -- appreciate the time that you spent this afternoon, and for your continuing interest in Federal Signal, and for your continuing support in our efforts to make this a stronger more profitability company for you, our shareholders, and we look forward to speaking with you again very soon and keeping you updated on our progress. And thank you, Lamont, for your help in running the call.

Ladies and gentlemen, thank you for your participating in today's conference. This concludes the program. You may now all disconnect.