Federal Signal Corp (FSS) 2008 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to the first quarter 2008 Federal Signal Earnings Conference Call. My name is Karen and I will be your coordinator for today. At this time all participants are in a listen only mode. We will be facilitating 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 presentation over to your host for today's call, Mr. David Janek, Vice President and Treasurer. Please proceed.

Thank you, Karen. Good morning, everyone, and welcome to Federal Signal's first quarter 2008 Conference Call. Joining me today are Jim Goodwin, our interim President and Chief Executive Officer, and Stephanie Kushner, our Senior Vice President and Chief Financial Officer. On the call today, Jim will discuss the progress made on several initiatives underway at the company. Stephanie will then comment on our financial results for the quarter, and she will provide an outlook for the year. Following these prepared remarks, we'll open the call for your questions. Before we begin, I must remind you that some of our comments may contain forward-looking statements that are subject to the Safe Harbor language found in today's news release, and in Federal Signal's files with the Securities & Exchange Commission. These documents are available on our website at federalsignal.com. I will now turn the call over to Jim.

Thanks, Dave, and good morning to everyone. The first quarter was a productive one for Federal Signal, as we made noteworthy progress on a number of important strategic initiatives. I'd like to take moment to discuss these developments, beginning with the changes to our portfolio of businesses. As you saw in our press release last week, we completed the sale of our remaining tool businesses to Canal Limited, which included our Dayton Progress Corporation, and its subsidiary, PCS Corporation. We realized 64 million net of taxes on the divestiture, and we expect to use the proceeds to pay down debt associated with the recent acquisitions in our Safety and Securities Systems Group.

We also made progress on our initiative to explore strategic alternatives for our E-ONE business, which we announced last quarter. I'm pleased to report that we are currently in advanced discussions with a potential buyer, and may reach an agreement as early as the second quarter of this year. With our strategic transformation nearly complete, we can begin to turn our attention to fully leveraging our strong asset base and unique position in the market to deliver better overall returns, and consistent shareholder value creation over the long-term.

An important ingredient to our success and achieving and delivering value is leadership, and today, I'm pleased to report that we're making progress identifying a world-class candidate to lead the company in the coming years. Given the interest level of some highly qualified candidates to whom we've been speaking, I would expect we'll be able to announce the new CEO by the end of the second quarter. We've also taken steps to strengthen our leadership at the board level with the appointments of Dennis Martin and Joseph Wright. Dennis Martin is the former Chairman and CEO of General Binding Corporation, and has significant experience in helping businesses simplify their business model. Joseph Wright is currently the Vice Chairman of Scientific Games Corporation, and brings a wealth of experience in the public sector in the IT industry. Both directors have relevant experience that I believe will prove to be invaluable as we turn the page to a new chapter in our proud heritage.

The next important development I would like to update you on is a hearing loss litigation. Last Friday, we announced that a Cook County, Illinois, jury absolved the company from any liability in a suit brought by 27 Chicago firefighters, claiming that they had suffered hearing loss as a result of exposure to sirens manufactured by the company. This was a landmark case for us, and we couldn't be happier with the court's decision. Importantly, this announcement comes on the heels of the dismissal of a similar case filed in New York late in 2007. While we can't predict our success in defending other related cases, we are confident our position is justified, and we will continue to vigorously defend our company to the fullest.

While we made significant progress on a number of fronts, I would be remiss if I didn't acknowledge the macroeconomic headwinds and softening domestic economy, which began to adversely impact several of the markets we serve in the first quarter. Our biggest concern today is the decline in municipal spending in North America. As you know, municipal spending commitments typically lag recovery in the general economy because of the delay in tax receipts and the mechanics of the municipal budgeting process. Given the broader economic slowdown, some municipal customers have begun to delay orders until visibility improves. While we continue to keep a close eye on the domestic economy, we are prudently managing our cost to navigate the challenging environment and insure we're positioned for long-term success. We remain committed to reducing our planned 2008 spend by $20 million, and we are focused on additional reductions that may be necessary to offset softer volume levels. These steps will help strengthen our foundation from which to grow, and deliver increasing shareholder value.

Another key concern for us today is a rising cost of raw materials, specifically steel and petroleum-based products. While we are under contract for our 2008 steel purchases, this only provides a certain amount of protection from rising commodity costs. Continued strength in worldwide demand for key commodities, coupled with the weak dollar and the higher oil prices, suggest the upward trend in raw material costs is far from abating. To counter this ongoing development, we have initiated some mid-year price increases that should take effect this quarter.

Despite these macroeconomic concerns, we have shifted our internal resources to support several exciting initiatives, that are not only performing well in the current environment but also offer the opportunity for long-term shareholder value. SSG in particular, our newly formed Public Safety Systems Division, experienced notable growth in the quarter. The new division comprises the acquisitions we made in 2007, as well as some of the company's longer standing warning systems. Just a couple of weeks ago, AT&T announced an agreement to provide a technology platform for public safety, which will utilize the company's Codespear Smart Message Communication Suite. This is the first time a network services company has offered a platform that enables instant first responder notification and inner operable communications across a broad range of communications devices. Importantly, we are seeing impressive results in the bundling of our Codespear technology with other Legacy products. Our more comprehensive solution is increasingly being viewed as a key competitive advantage, which has assisted in the sale of not just Code Spear technology, but our other products, such as our Emergency Warning Systems.

As we mentioned last quarter, we are making investments in our businesses. The expansion of our Bronto operation in Finland is well underway and will add a 40% increase in capacity. The build-out is pacing ahead of schedule and we now expect the facility to become operational by mid July. At our vector plant in Streeter, we're exploring options to provide increased manufacturing capacity to reduce our backlogs, and improve our ability to meet customer demand. As you know, we've experienced strong demand for our vac-trucks in part due to the aging infrastructure of sewer systems across the country.

We're also making gains in China. As you might recall, we originally entered the market in 2005, with the establishment of the Federal Signal Environmental and Sanitary Vehicle Company. The joint venture was originally tasked to manufacture compact refuge trucks for the Asian market. And now our depth and breadth of products manufactured and sold in the region have expanded, and include a street sweeper, light bars, and other products from our safety and security systems family. During the first quarter, we were pleased to complete the sale of our first street sweeper order, and interest continues to grow for our suite of mining-related products and technologies. While the current economic environment has given everyone in the market a reason to pause, we continue to chart our own path towards exiting our strategic transformation phase. We achieved a number of important milestones this quarter and are on the cusp of moving past a period in our history that can only be characterized as challenging. But, we continue to stay focused on our vision of advancing safety, security, and well-being for communities and workplaces around the world. Federal Signal is a company with a proud history and a strong heritage. And while we still have a lot of work ahead of us, we're confident our future looks bright. With that, I would like to turn the conference call over to Stephanie, who will comment further on our first quarter results. Stephanie?

Good morning. Before talking about the continuing operations results for the quarter, I'll make some comments about the large loss recorded in discontinued operations. The $89 million loss includes two large charges. A $27 million loss on the sale of our tool business, stemming primarily from almost $56 million of goodwill in the segment. I would just point out that the sale of the first part of the segment a year ago resulted in an almost equivalent $25 million gain, so the total transaction was done at very close to book value. The other part of the charge was $58 million for E-ONE. The size of this charge reflects an impairment of the investment given our probable net realizable value in the market today.

Although we've reduced our net investment in this business considerably, through a $32 million reduction in working capital over the past few quarters, we believe that absent this write-down, there would an considerable gap between our carrying value and the value we will realize upon a sale. After the discontinuation of E-ONE and the sale of Tools, the profile of the company changes materially. We become a roughly $1 billion company with almost half of our sales and 30% of our employees outside the U.S., and a materially higher operating margin. We are in the process of restating our 2007 quarterly results on the new basis, and will be releasing that information later in May. For the full year of 2007, EPS on a restated base would be about $0.82. We're still finalizing the tax calculation on that.

Turning to the first quarter, I'll start with a review of our orders. At $252 million, our first quarter order intake was about 6% below a year ago, but still about 11% higher than our shipments, due in part to the strong Euro. At the end of the quarter, our backlog had risen to $368 million, versus $309 million a year ago, and $332 million last quarter. Our U.S. municipal and governmental orders totaled $66 million, down about 12%, or approximately $9 million, mainly due to reduced sweeper orders, where we're experiencing some weakness across the U.S. We believe this is partly due to the extreme winter and additional spending on snow removal but we're watching our order intake carefully closely managing our expenses and balancing production across our product lines to utilize excess capacity.

As we commented last quarter, our municipal police light bar and siren business was somewhat soft as well, as municipalities appear to be deferring some of their new police car purchases. Industry figures show U.S. police car deliveries in the first two months of the year, which is the latest data we have available, are down about 8% from the prior year. Our sales were down slightly less, but our incoming orders in the same period were down more significantly, about 16%, which gives us concern about the trend in the second quarter. Our industrial and commercial orders totaled $65 million, about 4% below the prior year. Vacuum truck orders were down slightly from a year ago, but after such a strong fourth quarter, where we were actually up almost 37%, and with our strong backlog, we're not terribly concerned about the impact of that at this time. Orders outside of the U.S. totaled $120 million,n representing almost half of our total business. This was down about 4% from a year ago or 12% if you exclude currency, despite the addition of $10 million in orders for PIPS cameras from our U.K.-based operation. We don't believe this is indicative of any kind of trend but the usual lumpiness of our export tenders, which tend to occur in large chunks. For example, a year ago, we had an unusually large number of tenders for police products, from Thailand and Algeria in particular.

Turning to the income statement, consolidated revenue totaled $228 million, up 7% from $213 million a year ago. Only about 2% of the increase was volume. Another 2% price, and the balance is mainly currency. In general, a weak dollar is good for us because our International businesses sell mainly in the local markets and our U.S. businesses export typically to the Middle East or Asia, where they compete against local or European manufacturers. We reported a consolidated gross margin of 26.3%, up slightly from 26.1% a year ago, due to slight improvements in ESG and Bronto, partly offset by lower average margins at SSG. Our operating expenses totaled 20.7%, well above 18.2% a year ago. However, this figure included an additional $3 million spent on the hearing loss trial, $1.3 million in severance costs associated with the cost reduction program rolled out during the quarter, and a $1.7 million increase in a reserve on a disputed contract. Excluding these items, SEG&A would have been about the same as the prior year.

As we move through the year, we expect the results of our cost reduction efforts to bear fruit, the litigation expenses to decline after the second quarter, and that ratio to come down. Our consolidated operating margin was 5.6%, versus 7.9% a year ago. Again, the difference primarily reflects the impact of the items I just covered. Our effective tax rate was 19.3% in the quarter, down from 30% a year ago although we're projecting an average rate in the mid to high 20s for the year.

Turning to the segments, safety and security net sales was $91 million, up 15% from a year ago. The increase included $6 million for PIPS, which is in our public safety systems business unit, and increases in our Europe-based light bar and siren business, and our parking systems business. Operating income did not increase commensurately, and in fact was lower than we had expected a few months ago, although for the same reason. Putting aside the restructuring costs, which cost us about 50 basis points of margin, we were down about 2.5 percentage points from last year's quarter. Our primary shortfall was in our U.S.-based light bar and siren business, where sales were down, and margins were down further, due to lower overhead cost absorption and a less rich mix of sales. And we funded an operating loss of about $1.3 million, to support the expanded product launch and sales force for our Codespear and Riverchase product offerings. Although the order intake for the police business has remained relatively weaker than last year, we'll see some sequential margin improvement for SSG in the second quarter due to normal seasonal patterns plus higher volumes of shipments from PIPS, which are at a higher than average margin.

Results for environmental solutions were consistent with last year, despite incurring severance cost and increased expenses associated with the JD Edwards implementation. They booked revenue of $113 million, about the same as last year, with lower sales of sweeper,s but higher sales of industrial vacuums and sewer cleaners. I'm happy to report that sweeper margins have returned to the prior year level, due to the businesses success in addressing the margin issues we had experienced on our new pelican three-wheeled sweeper model. There was a strong cooperative effort between operations, procurement and sales to restore historical profitability in this flagship sweeper product. Operating income was $9.7 million including $5,000 of severance costs, Thanks to increased parts sales and good cost containment.

Turning to fire rescue, which now excludes the performance of E-ONE, we posted sales growth of 18%, and still saw the backlog rise by $45 million. Bronto revenues were constrained by tight chassis supply in Europe, as well as delays in receiving some outsourced components. Operating income rose in line with the sales increase. As expected, corporate expense rose to $7.3 million in the quarter, up sharply from a year ago due principally to a $3 million for the hearing loss litigation. As Jim noted, the trial was completed in late April, so much of the cost will fall into the second quarter. Our current estimate is that it will total $4 to $5 million in Q2. The figure is large because it includes a contingent success fee for the law firm representing us, which we're happy to be paying.

Our operating cash flow was strong in the quarter at $11.3 million. We benefited from a reduction in working capital associated with dealer floor planning, and a reduction of working capital at E-ONE, where the high level of inventory from about a year ago are being run off nicely, due to additional sales of stock trucks. Since the third quarter of last year, we've reduced working capital of E-ONE by about $32 million, and believe we can sustain that reduction more or less permanently. At March 31st, due to the large valuation impairment taken, our net debt to capitalization was very high at 45%. Since that date, of course, we received the $64 million for the tool business and applied this to reduced debt, bringing that figure down to below 40%.

As I stated last quarter, we knew our first quarter comps would be tough due to the heavy litigation spending and the weaker municipal orders plus no real impact from our cost reduction efforts. At this point, we expect the back half of the year to be stronger, but the Horizon remains murky, due to the economic situation. Looking to the full year, we continued to be focused on achieving a year over year earnings improvement from last year's restated $0.82 level. We're facing the headwinds of higher litigation expenses, a shakier U.S. economy, and commodity price pressures. On the positive side, however, we have the favorable momentum of the Bronto and Vactor volume growth, the addition of earnings from PIPS, lower interest rates and increased exposure to growing non-U.S. markets. This completes my prepared remarks and I'll turn it back to Jim to moderate questions.

Thank you, Stephanie. Karen, we would like to open the call to questions.

(OPERATOR INSTRUCTIONS) Questions will be taken in the order received. Your first question comes from the line of Terry darling with Goldman Sachs. Please proceed.

Thanks. It was encouraging to hear about the timing expected on potential divestiture of E-ONE, and I think you had mentioned a strategic buyer and I'm just wondering if we can imply from that, that we're talking about a private equity firm or whether you did not, in fact mean to imply that, and can you tell us where the book value is today?

Terry, good morning. The buyer we're in discussions with right now is a financial buyer, not a strategic buyer. And I'll let Stephanie respond to the book value today.

You know, because we're in discussions right now we would really rather not - - we're not planning to disclose that.

Stephanie, can you tell us what the first quarter revenue profit performance was?

Sure. Sure. In the first quarter, E-ONE had net sales of $53.2 million, which was up slightly from 47.7 a year ago. They recorded an operational loss of $6.2 million versus 3.9 a year ago. It was actually worse by $2.3 million, but there is an important distinction there. $4.3 million of that impact was really because they were reducing inventories rather than building inventories as they were a year ago. And, so that was $4.3 million negative, and then going the other way, is the impact of the overhead and SEG & A reductions that they've been working on. So, although it doesn't look like a better performance, it is a better core performance.

Right. Appreciate that you're in a sensitive situation here time-wise in terms of indications of value. I think you can also appreciate on our side, we're also trying to get some kind of a clue in terms of what may come of this in terms of your ability to further reduce debt. Maybe I can ask the question then in those terms. Should we expect a meaningful amount of debt reduction post the sale of this, or is it potential for the sale price to be - - to be very, very low at this point?

I would say we have taken quite a lot of working capital out of this business, so we've already benefited $30 plus million since we , frankly, started talking about this toward the end of last year. So there will be more debt reduction, but I guess it's fair to say I wouldn't look for a huge

Ok, then lastly, can you update us on the expenses expected related to the cost savings efforts? I think you mentioned that $20 million is still your target for the year. Can you update the spend related to that and can you update us on timing of realization of savings. Didn't really look like the first quarter saw a lot of that, and so maybe we've got a nice benefit in the back half.

In the first quarter, we spent $1.4 million. We expect to spend about $4 million in total over the course of the year. And we should more than cover that in terms of savings.

So, $4 million realized this year and the balance of the $20 million as you move into '09, is that the (inaudible)?

No, no, no, no. We're on target, Terry, for getting the $20 million out. The $4 million is the severance cost that will go against getting that $20 million.

Ok. Did we see any of the $20 million this quarter? Will we see any in the second quarter? Can you just help with us timing of realization of those savings?

Yes, there wasn't a lot, if you'll recall, we instituted these reductions first part of March, so there was minimal impact in Q1. So, the balance of these savings are going to play out over the next several quarters.

Ok. Thanks very much.

You're welcome.

Your next question comes from the line of Ned Borland with Next Generation Equity Research. Please proceed.

Good morning, guys.

Good morning, Ned.

Just going to safety here for a second. I mean adding back the severance and the $1.3 million to support the public safety business, I mean I'm coming up with about 11% operating margins. That's sort of below the traditional 12% to 15% range. I mean, I know that you had the light bar sales down in the quarter. Was there anything else with regard to mix that contributed to that?

Really, the biggest issue was the light bar sales, Ned. That's a relatively strong marginal profit business for us. And we were impacted primarily by that in the quarter.

And you said that you expect to see a sequential improvement in the margins, because there's just more orders coming in the second quarter from that at those products?

Yeah. Our second quarter tends to be a strong quarter in this business, in part because of municipal budgets, The budget year also a lot of municipalities closes out at the end of the second quarter. So last year, for example, I think our second quarter margin was 14.9%. So, we are expecting a nice boost in the second quarter of this year as well.

Ok. And then full year legal expenses, are we still look at, if we take the $3 million from this quarter and then what you're projecting for the second quarter, is that it for legal expense? I imagine you have some expenses in the back half of the year?

Yeah, we're still look at a full year $9 to $10 million. That's not changed from what I talked about last quarter.

Ok. And then with regard to the Bronto expansion, were there any costs related to that in the quarter?

Just - - I guess - - the only thing I would say is that we're still operating somewhat inefficiently, because of all the outsourcing that we're doing, but the actual project, the costs associated with that are almost entirely being capitalized.

Ok.

The ongoing cost of the outsourcing because of the capacity constraints is clearly having an impact on the margins.

Ok, alright, great.

Your next question comes from the line of Walt Liptak with Barrington. Please proceed.

Hi, thanks, good morning, everyone.

Good morning, Walt.

My question is on the safety and security group. You know, with the order entry and I guess the backlog, the decline in the backlog to $67 million, versus last quarter of 88 and a year ago down, could you talk about the different products that are not in backlog that you had previously?

I'm sorry, could you - -

I mean what's in the backlog? The mix of business in backlog? Your visibility right now going into the second quarter?

Ok. All of this is relatively shorter cycle business. So, there is a piece of our larger parking installations that would typically be in backlog. One of the things you're seeing right now is that we're getting near the completion of the New York/New Jersey Port Authority so that has just about run through our backlog. We had some of the larger like offshore oil platform orders for - - in our electrical products business that would be in backlog, and again, I know we're getting close to shipping something pretty significant for Shell Pearl. Probably the other area, some of the large PIPS installations, for example, something right now for the city of London will be in backlog. But the other things, light bars and sirens, unless it is for a big tender, for one of these large exports orders, or something really sizable, that business tends to be more of what I would call a day in and day out business.

Ok, right. Book and ship. And then the commentary at the beginning, Jim, you mentioned that the economic issues, declining municipal spending, you were talking primarily about the light bars, or was there other products you're concerned about?

Principally, two areas. The light bars is clearly one. As Stephanie indicated, police car shipments are down, and that definitely is having an impact on light bars, but the other area is significant decline has been in the street sweeper marketplace, and that's being impacted principally by municipalities, but also to some degree by the housing industry slowdown. A lot of the contractors and builders use street sweepers to keep their construction areas cleaned up from truck traffic and particularly on the west coast, we're seeing a softness in the California markets on street sweeper orders.

Ok. And then last, I wonder if you could break out the -- the charge of $1.4 million. I think you said half a million dollars in environmental. How much is broken out into fire and safety?

You know, I think all of the numbers are actually in the release.

Oh, okay.

I think we had $400,000 that was in corporate, safety and security had $500,000. Actually nothing in the operational fire rescue, environmental was $500,000.

Ok, and how do you think that will break out for the second quarter?

Boy, that's - - I'm not sure - - I'm not sure I know with enough specificity, so much of it depends on - -

Okay, fair enough. Okay, thank you.

your next question comes from the line of Charlie Brady with BMO Capital Markets. Please proceed.

Thanks. Good morning. The safety security margins, you talk about a sequential increase in Q2, but given the downdraft, particularly on that light bar business, is it fair to say you're not expecting a year-over-year increase in that margin?

Yeah. I think that's right. Because we were at almost 15% last year.

Ok. Can you just speak to sort of the potential for order cancellations, as to what's in your backlog on some of these projects? You talked about orders being pushed out but I wonder if you can give us some sort of sensitivity to orders being cancelled. Are there deposits put down on much of this and obviously on the light bar, that's not in backlog, but some of the sweepers and the vacuum trucks and things like that.

I think experience would suggest that we see hardly any order cancellation. The Longly products are in high demand, and deliveries get accepted. The light bar market, for example, is a book-and-ship type process. So, I don't think we have any concerns about order cancellations.

Ok, and going back into the backlog again, what kind of protection do you have on what's the product in the backlog now, the orders in the backlog now for raw material price increases or surcharges coming through? Are you hearing that from your suppliers you're going to get hit with a surcharge that would impact some of the margin that is already in backlog, or do you have the ability to reprice that?

We have not received any surcharges yet on our steel. That clearly doesn't mean we won't face something in the future, but at this point in time, we have not had any surcharges placed. As I mentioned, the last conference call, we are contracted through the balance of this year for our steel. We are beginning to see some flow-through cost increases on some of our manufactured components that we buy from other suppliers. And we, as I indicated in my opening comments, are taking advantage of those cost increases on raw materials to put new price increases out into the market place.

Ok. Final question, I'll get back in the queue. With respect to Bronto, you did an 8% margin in the quarter. Once that conditional capacity comes online, you don't have to do as much outsourcing, you're running more efficiently, what's a target operating margin goal for that business?

That business should be operating at double digit margins.

Low double digit?

I think low double digits.

Thanks.

your next question comes from the line of Steve Barger with Key Bank Capital. Please proceed.

Good morning.

Good morning, Steve.

I would like to talk about some of the newer products that you have. Can you talk about the size of the market opportunities for the newer higher margin stuff that came out of the acquisitions, and maybe talk about the outlook for federal funding in some of those markets.

I will start a little bit, and here's the issue. When we're kind of defining and building a market, it is very difficult to talk about the market size. So, for example, when we initially acquired PIPS, we believed we had a market size on the order of $150 million. But, when the products, as adoption occurs, that could grow fairly dramatically for things like congestion tolling or you know, increased usage of the product for recovery of stolen cars, and so on, so we view it as kind of a gestating market.

When you say fairly dramatically. Does that mean it doubles, or it is five times or you just can't define it, because it's much bigger than that.

I think we would be speculating all over the map if we tried to put a number on it. I think what's beginning to happen in this country, is municipalities and states are beginning to look at the opportunities that this technology has for them to increase revenues, outside the normal taxing window. And we've got three major cities right now that are currently exploring tolling systems, New York state unfortunately was unsuccessful at passing legislation to permit New York City to begin tolling. Even though federal funds were available, a grant in excess of $300 million was available for New York to do that from the federal government. The next opportunity for that to proceed is probably going to be this fall when the legislature re-convenes.

City of Chicago was just given a grant of $150 million to begin exploring tolling opportunities in congestion pricing here for the city of Chicago. Los Angeles is currently actively exploring the opportunity so I think as cities and states start to look at the revenue generating capabilities of this technology, with the help of the federal government who is making money available for this type of technology, I think we've got some very solid opportunities out there. All of these cities that we've been involved with, we have been the prime suppliers being bid into these projects, so, once the decisions are made to move forward, I think we're excited about the upside.

Okay. Maybe I'll try this one other way. Thinking about England, where we know there's a lot of cameras installed and PIPS had other competitors, do you know the dollar amount of cameras installed in that market?

We do and I don't have - - I don't know off the top of my head, but they're incredibly more densely situated than they - - than anyone's even ever even dreaming of having happened yet in the U.S, so we clearly think the U.S. is the opportunity.

Right. And so that's PIPS. Any idea of market opportunity for Codespear, or how are you thinking about that?

Well, not in total, but I think as I commented, Codespear has really opened up some new market opportunities for us, particularly municipalities look at the flexibility Codespear is giving them to deploy other products from Federal Signal. We're the only ones now that are in a position to offer to municipalities outdoor warning systems that are Codespear enabled, and that has generated a significant amount of interest in replacing older outdated warning systems with the new digital sirens that we're now deploying with Codespear. So, we had expected with the Codespear acquisition that we would be able to do traditional deployment like for mass notification, etcetera, but I think we're finding the bigger opportunities are starting to evolve now in using that product to help sell other products that we've manufactured for quite some time.

Right. So, when you bought Codespear, you must have had some estimate for this is going to be a $100 million market, or $300 million and I know it is hard to define the upper limit, but if you think about the dollar value of installed warning systems in the U.S., you must have some idea based on what that is, based on your own market share. Maybe you could kind of define in a numerical way what you think is possible.

Yeah, I guess I'm just not prepared to do that on this call. I take your point and again, the opportunities are shifting and growing at such a pace, it is a tough thing to build a comment on.

Okay. Let's try this. What do you think the organic growth rate might be for some of the newer products in the Safety and Securities segment, versus the organic growth rate for some of your Legacy products?

The PIPS growth rate, we were seeing when we acquired them was north of 20%, 25% per annum. So, I do think that within that Safety and Security group, we will have products that are growing at that sort of rate, 20%, 30% per annum and then some of the traditional products that are still in the single digits.

Okay, and any idea or can you tell us the idea - - the operating margin spread between newer products and some of the Legacy stuff?

You know, the gross margin spread can be 20% to 30%.

difference. Between a light bar and a installed (inaudible), 20% to 30%, that's great.

Yeah, but then the selling, the intensity of the selling, and the R&D is greater, so that's where you lose some of those margin points, and it all depends on the rate at which we can grow the volumes. Some of those , the SG & A and the R&D type expenses are

Even factoring that in, is it safe to say that these are higher margin products than the Legacy stuff?

Yeah, they should not be dilutive, that's for sure.

All right. One more. In terms of looking for the new CEO, is the candidate likely to come from a diversified industrial company, or are you searching for someone with more experience with a technology or proprietary engineering product background, or what would the candidate look like in terms of resume?

At the moment, we have candidates from both of those camps. We've been extremely pleased with the quality of candidates that we have seen. We've already talked to 12 candidates in the first round. We've narrowed that down to ten, which we're currently putting through a second round of interviews with the search committee, and it is our intent after this second round that we will call that list down to probably three, which we will then present to the full board for consideration. But right now, we have candidates out of both camps.

All right. Very good. I'll jump back in line. Thanks.

your next question is a follow-up from the line of Terry Darling with Goldman Sachs. Please proceed.

Thanks, couple of quick follow-ups. Stephanie, can you give us the '07 Bronto revenues and operating income?

Yeah, I can do that.

Okay.

Okay, the net sales $118 million; the orders were about $174 million. The operating income for Bronto $7.9 million.

Okay, and that margin then implied is below that 10% to 13% range, and so you were still struggling the same outsourcing impact at that point.

Yeah, I mean they were just operating generally at a lower volume. That's before we were convinced that the investment in the expansion was appropriate.

Okay, and you had 18% growth in the first quarter (inaudible) and 40% additional capacity post July. So, the overall growth rate here for the year should be what, in the 25% to 30% range? Or is that 18% above where - -

Yes, so it's sort of probably 20% on the top line.

Okay. And then, on the litigation expense issue, should we be making assumptions that some continues into 2009, or is it just too early to call at this point?

I would say it is too early to call.

Okay, and then, lastly Jim, I think in your opening comments, and I can't remember exactly how you phrased it, but something in the -- something about we're exiting the first phase, or we're exiting the strategic reorganization phase or something like that. I guess I'm just trying to get a sense as to how you and the board are thinking about the potential for additional acquisitions, or conversely, divestitures of other parts of the company, and it seemed to me that that comment suggested that you really were not thinking about any potential additional divestitures, but maybe you can set the record straight there for us.

You read that right. We've been focused on getting the tool business transaction closed, which we accomplished, and we're now working on finalizing the E-ONE transaction, and we have no other activity underway on the acquisition side, or for the divestiture side.

Okay, I'm actually going to try and sneak one more in here. Stephanie, can you give us the debt position today; i.e., post the proceeds from the Tool Group sale coming in, which I think you had mentioned in your comments there was $64 million. Is that right?

Yes, if you want to just subtract that from the number on the balance sheet.

Okay, great. Thanks very much.

This concludes the question-and-answer session of the call. I would now like to turn the presentation over to Jim Goodwin for closing remarks.

We would like to thank you all for being with us this morning. Hopefully we've been able to communicate that we are, in fact, taking the actions we committed to at the last conference call we had in February. Obviously, we have been quite bus,y and we remain focused on continuing to drive shareholder value higher, and we will continue to monitor the municipal marketplace. We'll continue to work on our cost reduction, and we look forward to sharing with you at the end of the second quarter the results of those efforts. Thanks again for your support.