Federal Signal Corp (FSS) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter one 2006 Federal Signal earnings conference call. My name is Lauren and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to Karen Latham, VP and Treasurer. Please proceed, ma'am.

Thank you, Lauren. Good morning and welcome. As usual, 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 issued in conjunction with this conference call for a more detailed discussion of the risks in our forward-looking statements. The press release is available on our website, federalsignal.com.

I will turn this over to Bob for his initial comments.

Thank you, Karen. Good morning, everyone, and thanks for joining our 2006 Q1 conference call. I am pleased to report that Federal Signal is continuing to make steady progress in our efforts to return the Company to a path of sustainable growth and profitability. Since we began our efforts to redefine The company under a new vision and mission statement, which we publicly introduced at the end of February at our Investor Day, I've witnessed a dramatic change in our corporate culture.

Our valued employees are becoming more proactive and accountable, and are truly taking ownership of the transformation we are undergoing. They have enthusiastically embraced the new strategic direction of the Company and are incorporating it in their daily work. As a result, our employees are revitalized and energized to make Federal Signal the leader in advancing security and well-being for communities and workplaces around the world. We are all confident in the Company's bright future.

Let's begin our review of the recently completed quarter with a few highlights. First, Federal Signal remains on track to meet its revenue and margin goals articulated by management in late February. Our businesses are making progress on the revenue and margin front and we are addressing issues that have affected our progress in isolated areas. I'm confident in the Company's ability to reach its 2006 goals.

Second, I am pleased to report that Federal Signal experienced a broad strengthening in all three of its major market segments, with total orders of 19% compared to the first quarter 2005. New business in the municipal and government sectors increased 15% from the prior-year period. On the industrial and commercial side, orders were up about 18% year-over-year. Non-U.S. orders registered the strongest gain, rising 26% from the prior-year period.

Third, as we announced in early March, Dave McConnaughey has joined Federal Signal as President of the Safety Products group. This segment experienced another strong quarter, and we are counting on Dave to continue to the Groups proud legacy. Over the coming months and years, we intend to focus on growing the businesses in Safety Products as we offer increasingly broad-scoped solutions in this very dynamic space.

Fourth, our divestiture process for the refuse business is progressing. As you might expect, we are limited in what we can share with you today. However, I can say that we expect to have this matter behind us when we talk to you about Q2 results.

Lastly, the Tool group experienced operational issues at the Dayton, Ohio facility related to production planning. This problem was caused by an error in a 2004 ERP implementation that only recently surfaced. It is a relatively straightforward problem to solve, but it will take us until midyear to get our inventory back in alignment with market demand.

Now I'd like to provide some brief comments relating to conditions in our markets and then cover results from our four business groups. From a new business standpoint, we had an exceptional first quarter. All market sectors were up and we continue to see broad strengthen in the early weeks of the second quarter. There are a lot of things going our way right now, including more robust municipal budgets, with priorities given to improving emergency warning and response systems and maintaining critical infrastructure, continuing Gulf Coast recovery efforts, and European markets beginning to show some improvement.

Moving on to our business segments, I'll begin with the Tool group. New orders in the U.S. were up 3% for the quarter compared with the same period last year. About half of the gain was from increased volume and half from price increases implemented throughout 2005. But then about half of the combined gains were offset by currency translation.

Orders from some of our traditional auto sector customers were somewhat lower. However, this was more than offset by orders from conquest accounts that resulted from sales channel initiatives undertaken over the past several months.

The group's non U.S. orders were down 13% due to weakness in Canada, Western Europe and Japan, in each case, primarily automotive industry related. Declines in these locations were partially offset by higher demand in China and Eastern Europe. We believe tool orders in the Western European market will recover in the second half of 2006, as delayed automotive industry projects move forward. But our expectation is for Japan to remain relatively flat for the rest of the year.

Income for the Tool group was lower by $500,000 compared to the same period last year. The decline was driven by two key issues -- the ERP system problem already mentioned hit us to the tune of about $700,000. But more importantly, the group incurred charges of about $930,000 for a voluntary workforce reduction at our Dayton, Ohio plant. We expect this reduction to benefit us by roughly $300,000 per quarter going forward.

As noted before, it will take us until midyear to get our stocks back in alignment with market demand, so the ERP problem will impact the second quarter as well. However, even with this problem, we believe the group will show positive comparisons for the rest of the year and will still be able to reach the performance level provided in our guidance issued in late February. The largest risk to achieving this goal is whether European orders recover as we expect them to do, and we're assuming North America automotive won't get materially worse.

Let's move on to our Safety Products group. I'd first like to comment on the leadership change announced in March. I'm delighted that we were able to recruit Dave McConnaughey to lead this group during a time when the business is poised for significant growth under our new direction. Many of the key technologies and core competencies that we will be leveraging in the coming years to advance toward our vision reside in this group. As such, we intend to focus intensely on growing these businesses. This will include integrating some strategic acquisitions that broaden our capabilities for a more complex and comprehensive solutions in this space.

Steve Buck, during his eight years of leadership of this group, did an outstanding job in improving margins and creating shareholder value. I deeply appreciate his many contributions during his 26 years with the Company and wish him well as he pursues future interests.

Within SPG, orders were strong for police and fire emergency signaling products in the U.S. and particularly brisk for outdoor warning systems. As we often state, orders for outdoor warning systems are lumpy; this quarter we happened to be on the positive side of the wave, as we enjoyed higher than normal orders. We received orders for tsunami warning systems from Hawaii and Oregon that have been in the works for some time. We're competing for a few other large tsunami systems, which we hope to land this year.

On the industrial and commercial side, orders for hazardous area lighting for oil rigs and coal mines have maintained their strength. Additionally, orders for large integrated warning systems used in applications such as petrochemical plants continue to benefit from a general upgrading of security systems in and around high-profile installations.

SPG export orders and orders at our non-U.S. operations remained strong during the period. VAMA, our emergency vehicle lighting business in Spain, had another great quarter for new business and continues to gain market share throughout Europe. The Victor Coal Mine lighting and high voltage electrical connector business remained a beneficiary of strong orders from China, as that country makes a concerted effort to upgrade their equipment and procedures in order to improve mine safety.

The only areas of new business weakness in the group relative to the year-earlier period occurred for large parking system installations, which are lumpy, and amber warning lighting that was somewhat lighter lower.

Revenues for the group were essentially flat compared with Q1 of 2005, but offsetting broad increases across our product lines was the absence of last year's $4.8 million from our large airport projects in parking, $2.6 million from the product line divestiture, and roughly $1.4 million from currency translation gains. Net of these, factors revenues are up approximately 11%, with 1 percentage point gain due to price increases.

On the income side, SPG is down roughly $1 million from last year. Gross margins in the group increased approximately 1 percentage point, indicating that progress is being made on that front. However, SEG&A expenses were up $2.3 million. About $1 million of this total resulted from the leadership change, with the remainder driven from increased legal expenses, higher R&D costs and increased headcount. We're standing by our previous revenue and margin guidance for the year for the group.

Now let's discuss Environmental Products group. The following comments exclude our North American refuse truck business, now carried as a discontinued operation. On the U.S. municipal market front, orders for Vactor sewer cleaning vacuum trucks continue to break records. U.S. municipal sector sweepers are roughly flat to the same period the previous year. Our Vactor and Guzzler vacuum trucks orders were extremely strong on the industrial side as well, with sweepers and water blasters also posting nice gains in this segment.

EPG export orders were also up nicely, even compared with the strong performance reported in the first quarter of 2005. Our initiatives to increase waterblasting equipment exports are starting to gain traction. Further, our RAVO sweeper business unit in the Netherlands enjoyed a great quarter in terms of new business.

We are beginning to firm up our first orders for refuse trucks at our JV in China. We have verbal commitments for two orders from the Shanghai area that alone would amount to about 25% of our planned volume for the first 12 months of production. Those aren't reflected in our backlog numbers yet, but are certainly a positive sign of things to come. We displayed a unit at a recent exposition in Beijing, and we were very happy with the attention and positive feedback our offering received. We believe our product will be the highest quality, best performing refuse truck in that market.

From a revenue standpoint, EPG was up 19% year-over-year, with strength registered across the board. However, income was up only 4%, and the group's gross margin declined modestly. A portion of the gross margin decline resulted from a price incentive program in our parts business which is now under review. The remainder was largely due to less rich product mix.

On the expense side, the group incurred charges of approximately $1.3 million higher than the year-earlier period based on three strategic initiatives, gearing up the China JV, implementing a new ERP system, and launching a focused parts business unit. Our full-year guidance for the EPG group remains unchanged.

Now on to Fire Rescue. New business was up roughly 17% over Q1 2005. Orders in the municipal sector were approximately 7% higher, with much of this gain attributed to price increases implemented during 2005. Orders for industrial pumpers, albeit a small segment, increased significantly. Export orders saw a tremendous year-over-year growth, although this is against a weak year-ago quarter in this very lumpy market segment.

Orders for our Bronto articulated aerial devices, another relatively lumpy sector, also posted significant gains. You may recall that at the year-end conference call we reported that Q4 2005 orders had been relatively weak at Bronto, but only due to the timing of some orders in the pipeline. Those orders landed during the first quarter of 2006.

We are very optimistic about the future of our Bronto articulated aerial device. Over the years, it has increasingly replaced ladder-based devices in Europe and other regions of the world outside North America. We believe we are in the beginning stages of a similar transformation here at home.

Within FRG, we have been dealing with some turmoil in our North American dealer channel over the past months as we work to restore sensible and equitable business practices and discipline in some areas that had gotten lax over the past several years. This has resulted in some tension in the channel and produced some voluntary and involuntary dealer representation turnover.

In those cases where we've needed to appoint a new dealer, we been very successful in targeting and entering into partnerships with outstanding business people that will help us expand our market share in the future. There still several markets that are not covered. It could take us the remainder of the year to identify and enter into agreements with the kind of top-quality business partners we're looking for. In the meantime, we've maintained our market share and have retained a strong backlog, due in large part to outstanding performance by some of our stronger dealers.

Revenues for the group were up 7%, with much of this expansion reflecting price increases implemented through 2005. The first quarter is generally FRG's weakest, but this fact was exacerbated due to the constrained shipments in the U.S. and Finland. A labor organizing campaign in Ocala resulted in that location failing to complete roughly 15 units by the end of the quarter. And in Finland, we missed shipping some expensive units due to the fact that our Middle East-based customer experienced difficulties in obtaining visas to travel for final inspection. With incoming orders much higher than completions, our backlog increased by approximately $20 million during the quarter at Fire Rescue.

FRG income was only marginally improved compared with the corresponding quarter in 2005 even though revenues were higher. Gross margins increased, and we're pleased about that, as it indicates continuing progress by our Ocala workforce in their drive to improve operations.

Their progress has been disguised somewhat by a few special charges. Ocala experienced roughly $1 million in charges related to a combination of consulting expenses associated with a union organizing attempt, higher bad debt expense and the settlement of a long-standing legal issue regarding trademark infringement.

The phasing down of production at our Red Deer Alberta plant has resulted in a $500,000 income hit during the quarter due to operating inefficiencies. Earlier this week, E-ONE announced plans to close the Red Deer plant by the end of the year. The strength of the Canadian dollar and difficulty we have in recruiting and retaining professional and skilled employees has made this manufacturing location nonviable.

One of the major product lines produced there was our wildlands firefighting trucks. Production of these vehicles has been transitioning to our business partner, Classic Fire, in Ocala, Florida under an agreement announced in 2005.

As I indicated, production throughput continues to improve in Ocala, and we are processing our first orders for complex trucks under our new EZ1 sales configurator tool. We are already seeing remarkable productivity improvements on the front end of our order processing and engineering departments with these early orders.

The rollout of EZ1 has been relatively trouble-free, and our dealers and salespeople are delighted with the functionality, which will help them with a significant productivity improvement on their end as well. As these orders flow through the system, we will see productivity improvement every step of the way.

For our Fire Rescue group, we reaffirm our guidance for 2006 that we provided in late February.

Companywide, primary working capital as a percent of sales is holding where we finished the year in 2005, declining to 19.8% of revenue from 22.5% at this time last year, and down from 24.5% in December of 2004. By the end of this year, we expect to have made additional progress as our EV measurement system continues to help focus the organization on working capital efficiencies.

Improvements were made during Q1 in each of the groups except for FRG, which was a little higher than where they were at the beginning of the quarter, largely due their restricted output in shipments.

I'll end my prepared comments today by repeating my gratification with the Company's progress. Our improving results have energized our employees as well as the management team, and we look forward to reaching all of our 2006 goals. I'll turn the call over to Stephanie for some more color on the numbers.

Thank you, Bob. Orders totaled $329 million in the quarter, as Bob mentioned, 16% above sales for the quarter and 19% above prior year. The strong order rate was broad-based and it strengthened the backlog for EPG, FRG and Safety Products.

The backlogs at March 31st totaled $434 million, up 11% from year-end and up slightly from a year ago. In EPG, we ended the quarter with $105 million in backlog; for FRG, $252 million; for Safety Products, $68 million; and for Tool, as is typical, about $9 million.

Turning to the income statement, our first-quarter sales totaled $284 million, up 7% from 2005, due mainly to higher shipment volumes out of Environmental Products. Of the 7% increase, 5.5% was volume and about 2% was higher realized prices. The pricing was mainly at FRG, where a number of pricing actions were taken during 2005.

Our gross margin averaged 25.3% in the quarter on a continuing operations basis, just slightly below 25.8% reported a year ago. The margin for Tool declined about 1 percentage point due to the expenses associated with the workforce reduction in Dayton, and in Environmental Products, the margin was lower due mainly to sales mix. On a positive note, both Fire Rescue, notably Ocala, and Safety Products reported improved margins.

As you may recall, our average margin for 2005 was 25.2%, and we are focused on gradually improving that to 28% over the next few years. Look for improvements as the year progresses.

Our selling, engineering, general and admin expenses as a percent of sales rose to 21.9% against 21.4% a year ago. The 50 basis point increase includes 20 basis points for the accounting change impact of expensing stock options, and also some events-driven charges totaling about $2 million. These include the leadership change at Safety Products; consulting and legal support in the face of the union drive in Ocala; the defense and settlement of an aged trademark dispute; and some increased bad debt reserves associated with a dealer resignation. While event-driven charges are not unusual, the number of them that fell into this quarter was high, so we expect this cost to smooth out as the year progresses.

As a reminder, last year's SEG&A expense was 19.7%, excluding the product line sale gain, and we have a medium-term objective of lowering that figure to 18%, while reallocating the components of the spend as we improve our transactional efficiencies.

Corporate expense, which is part of SEG&A, totaled $6.1 million in the quarter, up from $4.9 million a year ago. Although we expect corporate expenses to total about 2% of revenue, unchanged from 2005, they will be more evenly spread over the year at approximately $6 million per quarter, not back-end loaded like they were last year. This reflects a more normalized staffing level and less back-end loaded incentive compensation accruals as our earnings have become more predictable.

Interest expense was $5.9 million this quarter, down slightly from $6.1 million a year ago, reflecting lower average debt balances, which more than offset the impact of higher short-term borrowing rates.

Our income tax rate on operating earnings was 33% in the quarter versus less than 20% in the year-ago period. As you may recall in 2005, we benefited in the first quarter from the impact of a legislative change in the Finnish tax rate, which had a cumulative favorable impact on our Finnish deferred tax liability of about $500,000. Looking forward, we expect an effective tax rate this year of between 30 and 32%, depending on the geographical distribution of our earnings and the success of some key tax planning strategies.

Operating cash flow was a negative $4 million in that quarter due to a $10 million pension contribution and a $6 million increase in operational working capital. The modest increase in working capital raises operational working capital to $225 million at the end of the quarter, up from $219 million at year-end. A seasonal increase in inventories is not unusual for us, and our quarter-end working capital compared favorably with the same period last year.

At 19.8%, our six-month average operational working capital was well below 22.5% a year ago. For all of 2005, we averaged 19.7%, about where we are today, and we are committed to gradual reduction to 15% over the medium-term.

A couple of comments on our liquidity. As we indicated at year-end, during the first quarter we used a portion of our high year-end cash balances to prepay a $40 million portion of a $65 million private placement that is maturing in November. We also contributed $10.4 million to our defined benefit pension plan and spent $3 million to repurchase 175,000 shares of Federal Signal stock to offset the impact of dilution.

At quarter-end, our manufacturing debt was $236 million, down $40 million from year-end. As we had expected, our manufacturing debt, net of cash, rose to $209 million from $184 million at the end of 2005, or 36% of capital, reflecting the planned pension disbursements and stock buybacks. So on March 31st we have a healthy, low debt and low cash balance sheet.

I want to common briefly on our quarterly earnings pattern for this year and last year. Due to the discontinuation of refuse, quarterly earnings have been restated for 2005 and are as follows. Q1 of 2005, as we reported, was $0.09, which included a $0.01 benefit from a Finnish tax-rate change. Q2 on a restated basis was $0.32, and that included $0.14 that was mainly from the settlement of a tax audit and a reduction of deferred tax expense. Q3 restated was $0.29, including a $0.13 benefit from the sale of our product line. And Q4 was reported at $0.28, including $0.05 of tax savings associated with repatriating offshore cash.

As we closed out 2005, we indicated that we expected to improve year-over-year performance by 10 to 15%, excluding the $0.33 of one-time gains from the product line divestiture and the income tax resolution. We're off to a strong start for orders but a weak start for earnings, and I want to just put that into perspective.

This first-quarter $0.05 reported earnings includes about $0.05 of event-driven charges which are behind us and which will improve our position for the future. The total of these items is about $3.5 million in the quarter, or about $0.05 per share after tax. For the rest of the year, we should see a more normalized expense level, and in some cases, some payback for a $0.05 to $0.06 per quarter relative benefit.

The other significant positive factor we have are top-line increases. For the rest of the year, we expect report sales revenue in the $310 million to $320 million range per quarter, with notable increases in the sales run rate for both SPG, where we have a very strong backlog, and FRG, where sales are seasonably weakest in Q1. The addition of $25 million to $30 million per quarter in sales at a contribution margin exceeding 25% should boost quarterly earnings by about $0.10 to $0.12 per share.

Adding to this some gains in price realization should help should help bridge the gap. In total then, we remain confident and focused on delivering positive year-over-year earnings and revenue comparisons for the rest of the year.

I'm going to turn it back over to Bob now to moderate questions. Thanks.

Thank you, Stephanie. Lauren, let's go ahead and open up for questions.

(OPERATOR INSTRUCTIONS) Jack Kelly with Goldman Sachs.

Good morning, Bob. Could you comment in Fire Rescue on what caused the turmoil in the dealer network and what is being done to resolve that? And secondly, on the union organizing front, it's not unusual to incur extra expenses, but it sounded like the physical disruption was pretty high too, meaning to 15 units you cited. Where is all of that, and do we basically have a dissatisfied workforce, with the fact that the union organizing event was unsuccessful, the union was unsuccessful?

Okay. Let me talk about the dealer channel turmoil first. As I said in my remarks, our guys in FRG have been trying to put back in place some sensible, equitable, appropriate, natural -- or normal, I should say, practices and policies that you would expect to see in this kind of a business.

What had happened over a period of time, there have been a number of leadership changes at FRG. There were some things that had, frankly, just kind of drifted out of control. And some policies that were in place that, as we're trying to smooth out our shipments over a year period, were really getting in the way of us being able to do that. Instead of providing incentive for us and the dealer channel and the customer to take delivery of these trucks as soon as possible upon completion, some of our policies were not supporting that effort.

So we are undergoing a period of change in the business here. We're trying to upside or rightside a lot of things, and this is one of those areas that, as we've made great progress in stabilizing our production flow, made great progress in defining our product and getting it structured so that we could provide a very good sales tool with EZ1, we are also trying to fix these problems in the dealer channel.

So to resolve it, I mean, some policies are changing, some practices are changing. Our guys are working with the Dealer Council, who have been very supportive of these changes. Some of them they don't like, because it makes things less attractive to them in the future than it has been in the past. But nonetheless, they do recognize the importance of having these in place. So we are getting very good support from our Dealer Council.

And in some areas, some of the dealers that have been around are deciding that they don't want to deal with this and want to go someplace else.

So the main thing you are trying to get them to do is just take delivery? In other words, to smooth shipments for Federal Signal, you are trying to maybe get the dealers just to take more inventory or carry --?

No, absolutely not. That is absolutely not what we are trying to do. You may remember that at the end of '04 in particular, but even at the end of last year, we didn't reach the shipment forecast that we had put out there for the fourth quarter. And we ended up with a lot of units left over that we believed should have shipped. There were some disincentives in there for the customers to come and do the inspection and for the dealer to encourage the customer to do that on a timely basis.

So that is what we are trying to do. We are trying to set up a very smooth process, from the beginning of it to processing the order to the end of it, which is delivering the truck. Very smooth, very predictable and very effective. And we're absolutely not trying to get more inventory out in the dealer channel; that is the last thing we want to do.

Okay.

Let me talk about the union organizing attempt. This is -- again, we've had a lot of turmoil or turnover, rather, in management of this group over the years. There has been a lot of pressure on the business to, as we're trying to resolve these issues, there are some of our workforce that believe that they're better off with some third-party representation to protect them from management. I think you have that at any location.

But what we found during the organizing attempt is that as our leaders that we have in place down there now has established much better communication, both directions, they are listening, they are paying attention to the issues that our employees have. The biggest one during this campaign was around a very extensive use of mandatory overtime, as we're trying to improve our output.

And at the end of the day, the vast majority of our employees were supporting management, and that is the reason why the union withdrew their petition -- or asked the Labor Relations Board to withdraw the petition for an election, and that is what happened.

So we do have a good support from the vast majority of our employees. Our leadership team still has to make sure that they follow through by maintaining good communications and addressing and fixing some of these issues that have annoyed some of our people.

So I would say that, again, the vast majority of our people have a lot of confidence in the current management team. Those that perhaps didn't have as much, we think we're making progress winning them over. We still have a lot of work to do; there is no question. But we are committed to getting it done.

Just finally, on Tool you had mentioned, Bob, that you need Western Europe to kind of come back to hit your numbers for the year. Is that a function of your confidence that you're going to be on certain models or is this just general economic activity we're talking about? I think it was related to auto, specifically.

A much larger share of our business in Western Europe goes to auto than it does for the group as a whole. And in that market, we have good positions with all of the automakers and their suppliers. And much of our business is project-related, so we do have very good visibility to it. When it is at first delayed, we don't often know when it's coming back. And in this case, it looks like many of these projects that were delayed should be coming back in the second half.

And of course, Jack, the spending at the auto companies is dependent upon how profitable they are and so on. So it does in fact at the end of the day get back to being connected with the general economic activity.

Thanks.

(OPERATOR INSTRUCTIONS) Walt Liptak with Barrington Research.

Good morning, everyone. I understand the 2006 EPS outlook, the 10% to 15% growth off of the adjusted base. The question I have is in the first quarter, are you using the $0.05 or are you adjusting that to $0.10 for the charges?

No, we are using the $0.05.

Okay. So you are --

We are -- in looking at our improvement, we have really just pulled out of the prior year the tax and the productline sale gain that we disclosed in the last press release. But this year, there wasn't really -- very little of what happened in the first quarter was unplanned or unexpected. It just happened to be lumped into the first quarter.

Okay, that is fine. I guess the point is that you are missing a nickel from the first quarter, at least, but you expect to make that up later in the year.

That is correct.

Okay. And then along those lines, what was the value of the 15 trucks that got delayed and will those all ship in the second quarter?

I don't have that, Walt, what the value is. And yes, presumably those trucks will ship in the second quarter.

Okay. And then I wonder if you could clarify in the parking systems business the lumpiness that you talked about. Is that a lumpiness in shipments or is that a lumpiness in orders?

Well, it comes to both. Those huge airport orders, as you know, come in enormous lumps. And as we recognized revenue over it, it's over a longer period of time. So what I was referring to was a revenue recognition, so as we pass certain milestones. So it is relative to that. That last year first quarter we had some significant revenue recognition, certainly for New York, probably for Dallas as well.

Okay. I guess the question is what does the percentage of completion look like in the second quarter? Is there a better percentage of completion?

It will be higher, just because the progress in New York is accelerating.

Okay. And then for the revenue guidance that you gave, I think it was 310 to 320 per quarter, is that right?

Right.

For the rest of the year?

Yes.

Typically, your second quarters are seasonally stronger and it looks like you've got some business from maybe these fire trucks or parking systems rolling into the second. Wouldn't this be one of your stronger quarters for the full year?

Yes, typically the fourth is our strongest, the second is our second strongest, and then the third.

Okay, but plus you will have the variations from the first quarter that might happen in the second?

Yes.

Okay, thank you.

Brad Evans with Heartland Advisors.

Good morning to everybody. I hate to do this, but -- and I appreciate you're calling out the 3.5 million of unusual items -- but just to reconcile it, because I actually came up with $5 million of unusual items. So maybe I am double counting. But you talked about $1 million for the management change at Safety, $500,000 for the ERP issues at the Environmental unit, the $400,000 for the Shanghai JV ramp, $1 million for the Fire legal and consulting costs, $900,000 for the workforce reduction at Tool, $700,000 at the -- I guess that Tool ERP issue, and 500 at Red Deer restructuring.

Yes. When I --

Am I double counting somewhere?

-- when I added the numbers, I did not include the things that will continue to impact us this year. In other words, Red Deer will continue to have some small losses as the year progresses -- hopefully not as large as the first quarter. And then that ERP for Environmental Products, that project will continue to be a cost this year versus last year. Similarly, the joint venture, I think it will improve as the year progresses, but I did not include that in the what I called event-driven items.

So to me it looks like it is more like $0.07. But as you mentioned, some of those will --?

Some of it will continue.

Okay. The issue that arose at Tool, the ERP discovery net issue, was that a result of a deeper dive into that business?

It really resulted in -- what had happened is that the production process is in two steps, basically. We make what we call blanks, which are semifinished parts that we inventory, and we keep stock of thousands of SKUs of those. And then when we receive an order, we draw one of those blanks that is the closest to the final product and finish it, and typically ship it the same day or the next day.

What was going on is that we set some of these toggles in the implementation of ERP, we ended up losing visibility into how closely related our actual optimum blank demand would be as opposed to blanks that we were actually using. For example, for a certain part number, the system spits out a number of different blanks that you can use. And they rank them in order of which one takes the less amount of time to remove material. And so we always try to go for the optimum one. If that is not available, then we go down the list and find the next one, the next one, and the next one.

What was happening is that if, let's say, for example in an order we took the third from the top, third from the best, well then the system would create a demand for that blank that we actually used instead of the blank that we should have used. And so our blank inventory was just progressively getting more and more out of whack with what the optimum should be.

And it really hit us in January, I think it was, when we received a big order for blanks. We ship those out of inventory and all of a sudden we found that our blank inventory was way out of whack. So it has been creeping up on us for about a year and a half, and it just really took that one event to kind of trigger it so that we could see what was going on.

I'm sorry. So I know that in the annual report, Bob, you talked about just the longer-term fit for the Tool division. I was just curious as to whether this issue arose as you went in there into a deeper look at the business as you prepared to make a decision on the business?

Absolutely not. This would have happened in any case, because, again, it was just getting more and more out of whack, our product planners did not have visibility to the fact that this was going on. And the system was just automatically showing our people which blank that we had in inventory to use. And it would've happened in any case.

I appreciate your commentary on the early part of the quarter -- for the second quarter in terms of order activity. Is it as broad-based as you saw in the first quarter?

Yes, it is. Tool is kind of flat with last year again. But the rest of the business is very strong.

And my last question pertains to as the balance sheet has been greatly strengthened here over the last several quarters, how do you weight at this point deploying free cash flow vis-a-vis either on the M&A side or continue to buy back stock?

I think as we talked about in February, we are in a process right now of lining up, from a strategic perspective, the acquisitions that we are interested in that either are important from a technology or from a market perspective. And we are going to be reviewing that fully with our Board in July. And at that point, I think we would be in a position to be identifying some specific bolt-on type acquisition.

In terms of the share buyback, really our commitment is to offset the impact of dilution from stock-based compensation, and it's not a terribly large number. It is sort of in the $5 million to $6 million a year range.

Okay, thank you.

Charlie Brady with Harris Nesbitt.

Thanks. Good morning. On the Fire Rescue side of the business, looking at the Red Deer facility, can you give us some indication as to what kind of drag that was on the quarter and kind of what we can expect going forward?

It was about $500,000 in the quarter. At this point, we think it will continue to be a small negative as we build out the backlog up there. The overall exit from the business should be roughly neutral, could be plus $500,000 or minus $500,000.

Okay, thank you. When you talk about your distributors in Fire Rescue and you mention you still have some areas that aren't covered, can you specify what those areas are that sort of have some holes in the system right now?

Well, I would rather not get terribly detailed about this, because what we don't want to do is give our competitors a chance to come after us in some areas where we're not very well represented. But in a couple of cases, they're markets where we did have dealers and we have some interim measures in place to make sure we're still taking care of our customers and trying to generate some orders. In a couple of other cases, it's places where we haven't had dealers before.

Okay. Can you give a sense of how much Bronto was up in the quarter?

Their new business was up more than 50%, but again, tends to be somewhat lumpy.

And on the Environmental, you mentioned a price incentive program for parts that you are reviewing. Can you give us a little more detail exactly what that means, what that entails?

Well, we've put in place a dedicated business unit for parts. We think we can grow that business significantly over the years -- very nice margins. So we are concentrating on that. Then the guys where toying with an incentive program to generate significant additional sales. And with a quarter behind us now, we're taking a look at that to make sure that it still makes sense with that kind of incentive going forward.

I'm sorry -- so the incentive plan was essentially what? What was the plan?

It was volume based -- you know, the more you buy, the higher the discount.

Okay. And one final question and I will get back in the queue. On the Chinese joint venture, can you give us a sense of when you expect that to break even?

We expect to break even or be profitable in 2007.

Thanks very much.

Brad Evans with Heartland Advisors.

I guess another nonrecurring or unusual item relative to the prior year was the $600,000 for FAS 123(R). Is that a good quarterly run rate?

It is.

Okay. And Bob, just from a portfolio perspective, I'd love your thoughts as to whether you still think that the captive leasing business is significant and core to the business at this point?

As I indicated to you in the past, Brad, I don't really want to be a bank. What we are trying to do is to generate a profit on selling very good machines and specialized equipment to municipalities and industrial customers. The leasing, we believe, helps us with, particularly in the Fire Rescue business, to help sell trucks to particularly volunteer fire departments in small municipalities.

We continue to review that; we have the leasing business on their own EV measuring system. It is positive EV. But that is something that we will continue to monitor. If we sense some day that it's not helping us or that the EV contribution isn't that attractive, then we would look for some alternatives.

I don't know, Stephanie, if you have any thoughts.

No, I would agree what that.

So you think it in some cases provides you with a competitive advantage?

Yes, we do.

Yes. I mean, if you can imagine a small-size volunteer fire department, it might be difficult to get bank financing. Whereas we as a manufacturer can look at them and can understand kind of the trade-in value or the value of the collateral better. And we're really in a better position to lend to them.

Okay. Bob, could you just talk about -- or Stephanie -- the tenor on the raw material side in terms of availability and pricing? And a (indiscernible) area to that is just your thoughts on the pricing environment, as to whether you think you have opportunity to take additional price in 2006?

Well, we haven't had any availability issues. We had a couple of things that went bump in the night during the quarter, but nothing serious. And some of it around was some of our suppliers implementing ERP systems. But generally, availability hasn't been an issue.

There has been some rhetoric in the press regarding steel prices. We haven't seen any movement up so far in the last few months. Aluminum has gone up since last year. There is a potential for a strike at Alcoa, which we are keeping our eyes on, but that won't affect us too much.

The demand is very solid right now in several of our business units, so we are looking at pricing opportunities. I'm concerned about the price of oil, the price of gasoline, that if doesn't go down, that we will start to see additional price increases and surcharges for transportation and so on. So we just don't want to be late at the party, if we start to see material costs going up. Certainly with the price of oil, plastics will go up. We don't use too much of that, but rubber and tires and hoses and so on affects us.

We did have a price increase in Fire Rescue effective April 1, I think it was. And we will continue to keep watching and making sure we don't fall behind the ball again.

If I could just ask you, last quarter you talked about a bottleneck that was a festering problem down in Ocala in terms of -- at the inspection level. Have you been able to rectify that?

We are making fantastic progress. I don't recall the exact numbers, but it's something like this. Our [gigs] at customer final inspection in the first quarter were something like three or four. And a year ago, it was orders of magnitude higher than that. So that is -- as we're establishing that kind of credibility with our customers, then we are much more apt to be able to get them to commit to a certain inspection date, because they have confidence that when they come there, the truck is going to be in great shape.

The other thing that helps us is, as we improve in our ability to get the completions done during the week that it's scheduled. Again, we are much, much better at that than we were even a year ago. And that again helps us with the credibility with the customer.

So, it's a process. We've got the fundamentals right, so we should be able to continue improving. Mark and his people are addressing these policy issues to remove the disincentives that we have in place in some cases for the customers and the dealer to get there as soon as possible. So all of these things will help us a lot.

Okay. Just my last question and I will cede the floor. And that is a relative to the right side of the balance sheet, do you anticipate any major refinancing requirements over the course of the year, Stephanie?

No, we don't. I think we have everything in place that we need to have in place.

Okay. Good luck, guys.

Charlie Brady with Harris Nesbitt.

Thanks. On the Environmental side, any large export orders in the quarter that were more unusual than you might normally see?

No. I don't think so. It was again quite broad-based.

Okay, thanks.

There are no further questions in queue at this time.

Okay. I guess our time is up. Again, I would just like to tell everyone thank you for your interest, thank you for your confidence. We hope to show you a very good year in 2006 that will demonstrate continuing progress to return the Company to a position of sustained revenue growth and profit growth. And thank you very much. Have a great day.

Thank you very much for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.