May 2, 2008
Executives
David Janek – Vice President, Treasurer James Goodwin – President, Chief Executive Officer Stephanie Kushner – Senior Vice President, Chief Financial Officer
Analysts
Terry Darling – Goldman Sachs & Co. Ned Borland – Next Generation Equity Research Walt Liptak – Barrington Research Charlie Brady - BMO Capital Markets Steve Barger – KeyBanc
Operator
Welcome to the first quarter 2008 Federal Signal earnings conference call. (Operator Instructions) I would now like to turn the call over to your host for today’s call, David Janek, Vice President and Treasurer.
David Janek
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 will 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 filings with the Securities and Exchange Commission.
These documents are available on our website, www.FederalSignal.com. I will now turn the call over to Jim.
James Goodwin
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 a moment to discuss these developments beginning with the changes to our portfolio of businesses.
As you saw on our press release last week we completed the sale of our remaining Tool businesses to Connell 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 Security Systems group.
We also made progress on our initiative to explore strategic alternative for our E-ONE business which we announced last quarter. I am 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 in achieving and delivering value is leadership.
Today I am pleased to report we are making progress identifying a world-class candidate to lead the company in the coming years. Given the interest of some highly qualified candidates to whom we have been speaking I would expect we will be able to announce the new CEO by the end of the second quarter.
We have 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 Gains Corporation and brings a wealth of experience in the public sector and 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’d like to update you on is the hearing loss litigation. Last Friday we announced that a Cook County Illinois jury absolved the company from any liability from a suit brought by 27 Chicago Firefighters claiming that they had suffered hearing loss as the 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 are serve in the first quarter.
Our biggest concern today is the decline in municipal spending in North America. Municipal spending commitments typically lag recovery in the general economy because of the delay in tax receipts and mechanics of the municipal budgeting process.
Given the broader economic slow down 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 costs to navigate the challenging environment and ensure we are 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 level. These steps will help strengthen our foundation from which to grow and deliver increasing shareholder value.
Another key concern for us today is the 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 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 SmartMSG Communications Suite.
This is the first time a network services company has offered a platform that enables instant first responder notification and interoperable communications across a broad range of communications devices. Importantly we have seen 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 Codespear 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 Vactor plant in Streator we are exploring options to provide increased manufacturing capacity to reduce our backlogs and improve our ability to meet customer demand. We have experienced strong demand for our Vac trucks in part due to the aging infrastructure of sewer systems across the country.
We are 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 refuse trucks for the Asian market. Now our depth and breadth of products 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 work places around the world.
Federal Signal is a company with a proud history and a strong heritage. While we still have a lot of work ahead of us we are confident our future looks bright.
With that I’d like to turn the conference call over to Stephanie who will comment further on our first quarter results.
Stephanie Kushner
Before talking about the continuing operations results for the quarter I will make some comments about the large loss reported in discontinued operations. The $89 million loss includes two large charges, a $27 million loss on the sale of our Tool business stemming primarily of almost $56 million of goodwill in the segment.
I would just point out 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 have reduced our 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 be a considerable gap between our carrying value and the value we will realize upon its sale.
After the discontinuation of E-ONE and the sale of Tool, 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 re-stating 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 re-stated basis would be about $0.82. We are 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 are 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 are 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 date 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 are not terribly concerned about the impact of that at this time.
Orders outside the U.S. totaled $120 million representing almost ½ of our total business.
This was down about 4% from a year ago or 12% if you exclude currency despite the additions of $10 million in orders for PIPS cameras from our UK based operation. We don’t believe this is indicative of any 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 mainly currency.
In general, a weak dollar is good for us because our international businesses sell mainly in their local markets and our U.S. businesses typically export 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 in 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 this quarter and a $1.7 million increase in a reserve on a disputed contract. Excluding these items SG&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 rate should 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 are projecting an average rate in the mid to high 20’s 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 will 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 costs 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 sweepers 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 3-wheeled sweeper model.
There was a strong cooperative effort between operations, procurement and sales to restore historical profitability in the flagship sweeper product. Operating income was $9.7 million including $500,000 of severance costs thanks to increased part 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 an additional $3 million of expense 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 are 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 the reduction of working capital from E-ONE where a high level of inventory from about a year ago are being run off nicely due to additional sales of [stock talks]. Since the third quarter of last year we have reduced working capital on E-ONE by about $32 million and believe we can sustain that reduction more or less permanently.
At March 31, due to the large valuation impairment taken our net debt to capitalization was very high at 45%. Since that date, of course we have received $64 million from the Tool business and applied this to reduce that 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 continue to be focused on achieving a year-over-year earnings improvement from last year’s restated $0.82 level. We are facing the headwinds of higher litigation expenses, a shakier U.S.
economy and commodity price pressures. On the favorable 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 will turn it back to Jim to moderate questions.
James Goodwin
We would like to open the call to questions.
Operator
(Operator Instructions) The first question comes from Terry Darling - Goldman Sachs & Co.
Terry Darling – Goldman Sachs & Co.
It was encouraging to hear about the timing expected on the potential divestiture of E-ONE. I think you had mentioned a strategic buyer.
I’m just wondering if we can imply from that are we talking about a private equity firm or in fact if you did not mean to imply that. And can you tell us where the book value is today?
James Goodwin
The buyer we are in discussions with right now is a financial buyer, not a strategic buyer, and I’ll let Stephanie respond to the book value today.
Stephanie Kushner
Because we are in discussions right now we’d really rather not disclose that.
Terry Darling – Goldman Sachs & Co.
Stephanie can you tell us what the first quarter revenue profit performance was?
Stephanie Kushner
In the first quarter E-ONE had net sales of $53.2 million which was up slightly from $47.7 million a year ago. They recorded an operational loss of $6.2 million versus $3.9 million 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.
So that was $4.3 million negative. Then going the other way is the impact of the overhead and SEG&A reductions that they were working on.
So although it doesn’t look like a better performance it is a better core performance.
Terry Darling – Goldman Sachs & Co.
I appreciate you are in a sensitive situation here time wise in terms of indications of value. I think you can also appreciate on our side we are trying to get some clue in terms of what may come of this in terms of your ability to further reduce debt.
Maybe I can just 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 sales price to be very, very low at this point?
Stephanie Kushner
I would say we have taken quite a lot of working capital out of this business so we have already benefited $30+ million since we frankly started talking about this toward the end of last year. There will be more debt reduction but it is fair to say I wouldn’t look for a huge number.
Terry Darling – Goldman Sachs & Co.
Lastly can you update us on the expenses expected related to the cost savings effort? I think you mentioned $20 million is still your target for the rest of the year.
Can you update the spend related to that? Can you update us on timing of realization of savings?
It didn’t look like the first quarter saw a lot of that so maybe we’ll have a nice benefit in the back half.
Stephanie Kushner
In the first quarter we spent $1.4 million. We expect to spend about $4 million in total over the course of the year.
We should more than cover that in terms of savings.
Terry Darling – Goldman Sachs & Co.
So $4 million realized this year and the balance of the $20 million as you move into 2009?
James Goodwin
No. We are on target for getting the $20 million out.
The $4 million is the severance costs that will go against getting that $20 million.
Terry Darling – Goldman Sachs & Co.
Did we see any of the $20 million this quarter? Will we see any in the second quarter?
Can you just help us with timing and realization of those savings?
James Goodwin
There wasn’t a lot. If you recall we instituted these reductions the 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.
Operator
The next question comes from Ned Borland - Generation Equity Research.
Ned Borland – Next Generation Equity Research
The severance and the $1.3 million to support the Public Safety business, I’m coming up with about 11% operating margin below the traditional 12% to 15% range. I know you had the light bar sales down in the quarter.
Was there anything else with regard to mix that contributed to that?
Stephanie Kushner
The biggest issue was the light bar sales. That is a relatively strong marginal profit business for us and we were impacted primarily by that in the quarter.
Ned Borland – Next Generation Equity Research
You said that you expect to see a sequential improvement in the margins because there are just more orders coming in the second quarter for those products?
Stephanie Kushner
Our second quarter tends to be a strong quarter in this business in part because of municipal budgets…the budget year of a lot of our municipalities close 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.
Ned Borland – Next Generation Equity Research
Full-year legal expenses, are we still looking at if we take the $3 million from this quarter and what you projected for the second quarter, is that it for legal expense? I imagine you have some expenses in the back half of the year.
Stephanie Kushner
We are still looking at a full-year $9 to $10 million. That has not changed from what I talked about last quarter.
Ned Borland – Next Generation Equity Research
With regard to the Bronto expansion were there any costs related to that in the quarter?
Stephanie Kushner
The only thing I would say is we are still operating somewhat inefficiently because of all the outsourcing we are doing but the actual project and costs associated with that are almost entirely being capitalized.
James Goodwin
The ongoing cost of the outsourcing because of the capacity constraints is clearly having an impact on the margin.
Operator
The next question comes from Walt Liptak - Barrington Research.
Walt Liptak – Barrington Research
On the Safety and Security Group, with the order entry and the backlog, the decline in the backlog was $57 million versus last quarter of $88 and a year ago down. Can you talk about the different products that are not in backlog that you had previously?
What is in the backlog? The mix in business in the backlog.
Your visibility right now going into the second quarter?
Stephanie Kushner
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 now is we are getting to the completion of the New York/New Jersey Port Authority so that has just about run through our backlog.
We have some of the larger offshore oil platform orders in our Electrical business that are in backlog. Again I know we are getting close to shipping something pretty significant for Shell [Perl].
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 export orders or something really sizeable that business tends to be what I call a day-in day-out business.
Walt Liptak – Barrington Research
Then the commentary at the beginning, Jim you mentioned the economic issues and decline in municipal spending. You were talking primarily about the light bars or was there other products you were concerned about?
James Goodwin
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.
The other area of significant decline has been in the street sweeper marketplace. That is being impacted principally by municipalities but also to some degree by the housing industry slow down.
A lot of the contractors and builders use street sweepers to keep their construction areas cleaned up and cut traffic and particularly on the west coast we are seeing a softness in the California market on street sweeper orders.
Walt Liptak – Barrington Research
Lastly, I wonder if you could break out the charge of $1.4 million. I think you said $500,000 in environmental.
How much is broken out into Fire and Safety?
Stephanie Kushner
I think all the numbers are actually in the release. We have $400,000 in [inaudible].
Safety and Security had $500,000. Actually nothing in the operational Fire Rescue, environmental was $500,000.
Walt Liptak – Barrington Research
How do you think that will break out for the second quarter?
Stephanie Kushner
I’m not sure. I am not sure I know with enough specificity.
Operator
The next question comes from Charlie Brady - BMO Capital Markets.
Charlie Brady - BMO Capital Markets
The Safety Security margin you are talking about a sequential increase in Q2 but given the downdraft particularly on that light bar business is it fair to say you are not expecting a year-over-year increase in that margin?
Stephanie Kushner
Yes I think that is right. We were at almost 15% last year.
Charlie Brady - BMO Capital Markets
Can you just speak to the potential for order cancellations as to what is in your backlog on some of these projects? You talked about orders being pushed out but I’m wondering if you can give us some specificity on orders being cancelled.
Are deposits put down on much of this? Obviously with the light bars it is not in backlog but some of the sweepers and vacuum trucks and things like that.
James Goodwin
I think experience would suggest we see hardly any order cancellation. The long-lead products are in high demand and deliveries get accepted.
The light bar market, for example, is a book and ship type of process. So I don’t think we have any concerns about order cancellation.
Charlie Brady - BMO Capital Markets
Going back into the backlog again, what protection do you have on what products are in the backlog, the orders in the backlog now for raw material price increases or surcharges coming through? Are you hearing from the suppliers that you are going to get hit with a surcharge that is going to hit some of the margin that is already backlogged?
Or do you have the ability to reprice that?
James Goodwin
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 in 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.
As I indicated in my opening comments we are taking advantage of those cost increases on raw materials to put new price increases out into the marketplace.
Charlie Brady - BMO Capital Markets
With respect to Bronto you had an 8% margin in the quarter. Once that additional capacity comes online and you are not doing as much outsourcing and you are running more efficiently, what is a target operating margin goal for that business?
Stephanie Kushner
That should be operating at double-digit margins. I think low double-digits.
Operator
The next question comes from Steve Barger - KeyBanc.
Steve Barger – KeyBanc
I’d 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?
Maybe talk about the outlook for federal funding in some of those markets?
Stephanie Kushner
Here is the issue, when we are 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 as adoption occurs that could grow fairly dramatically for things like congestion tolling or increased usage of the product for recovery of stolen cars and so on.
So we view it as a gestating market.
Steve Barger – KeyBanc
When you say fairly dramatically does that mean in doubles? Or five times?
Or you just can’t define it because it is much bigger than that?
James Goodwin
I think we would be speculating all over the map if we tried to put a number on it. I think what is 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.
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 reconvenes.
The City of Chicago was just given a grant of $150 million to begin exploring tolling opportunities and 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 have got some very solid opportunities out there. All of these cities we have been involved with we have been the prime supplier being bid into these projects.
So, once the decisions are made to move forward I think we are excited about the upside.
Steve Barger – KeyBanc
Thinking about England where we know there are a lot of cameras installed and PIPS had other competitors, do you know the dollar amount of cameras installed in that market?
Stephanie Kushner
We do and I don’t know off the top of my head. But there are incredibly more densely situated than anyone has ever even dreamt of having in the U.S.
So we clearly think that the U.S. is the opportunity.
Steve Barger – KeyBanc
So that is PIPS. Any idea of market opportunity for the Codespear?
How are you thinking about that?
James Goodwin
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 are the only ones now in the 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 are now deploying with Codespear. So we had expected with the Codespear acquisition we would be able to do traditional deployment for mass notification, etc.
but I think we are finding that bigger opportunities are starting to evolve now and using that product to help sell other products we have manufactured for quite some time.
Steve Barger – KeyBanc
So when you bought Codespear you must have had some estimate for this will be like $100 million market or $300 million? 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 of what that is; basically your own market share. Maybe you could define in a numeric way what you think is possible.
Stephanie Kushner
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 that is a tough thing to be able to comment on.
Steve Barger – KeyBanc
What do you think the organic growth rate might be for some of the newer products in the Safety and Security segment versus the organic growth rate for some of your legacy products?
Stephanie Kushner
The PIPS growth rate we were seeing when we acquired them was north of 20% to 25% per annum. So I do think within that Safety and Security group we will have products that are growing at that rate of 20% to 30% per annum.
Some of the traditional products are still in the single digits.
Steve Barger – KeyBanc
Any idea or can you tell us the operating margin spread between newer products and some of the legacy stuff?
Stephanie Kushner
The gross margin spread can be 20% to 30%.
Steve Barger – KeyBanc
Difference between a light bar and an installed [inaudible] system, 20% to 30%.
Stephanie Kushner
Yes, but then the intensity of the selling and the R&D is greater so you lose some of those margin points and it all depends on the rate at which we can grow the volume. Some of those, the SEG&A and the R&D type expenses are fixed.
Steve Barger – KeyBanc
Even factoring that in, is it safe to say these are higher margin products than the legacy stuff?
Stephanie Kushner
Yes. They should not be dilutive, that is for sure.
Steve Barger – KeyBanc
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 more experienced with a proprietary engineering product background? What would the candidate look like in terms of resume?
James Goodwin
At the moment we have candidates from both of those camps. We have been extremely pleased with the quality of candidates we have seen.
We have already talked to twelve candidates in the first round. We have narrowed that down to ten which we are currently putting through a second round of interviews with the search committee.
It is our intent after this second round that we will cull that list down to probably three which we will then present to the full Board for consideration. Right now we have candidates out of both camps.
Operator
The next question is a follow-up from Terry Darling - Goldman Sachs & Co.
Terry Darling – Goldman Sachs & Co.
Stephanie can you give us the 2007 Bronto revenues and operating income?
Stephanie Kushner
Net sales $118 million. Orders were about $174 million.
Operating income for Bronto was $7.9 million.
Terry Darling – Goldman Sachs & Co.
That margin then implies below that 10$ to 13% range and so you were still struggling with the same outsourcing impact at that point?
Stephanie Kushner
They were just operating generally at a lower volume. That is when we were convinced the investment in the expansion was appropriate.
Terry Darling – Goldman Sachs & Co.
You had 18% growth in the first quarter layering in 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 the run rate is?
Stephanie Kushner
Probably 20% on the top line.
Terry Darling – Goldman Sachs & Co.
On the litigation expense issue should we be making assumptions that some continue into 2009 or is it just too early to call at this point?
James Goodwin
I would say it is too early to call.
Terry Darling – Goldman Sachs & Co.
Jim, in your opening comments, something about exiting the first phase or strategic reorganization phase or something like that, 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 seems to be that comment suggested you really were not thinking about any potential additional divestitures? Maybe you can just set the record straight there for us?
James Goodwin
You read that right. We have been focused on getting the Tool business transaction closed which we accomplished, we are now working on finalizing the E-ONE transaction, and we have no other activity underway on the acquisition side or the divestiture side.
Terry Darling – Goldman Sachs & Co.
Stephanie can you give us the debt position today, i.e. post proceeds from the Tool group sale coming in?
I think you had mentioned in your comments there was $64 million?
Stephanie Kushner
You can subtract $64 million from the number on the balance sheet.
Operator
This concludes the question-and-answer session of the call.
James Goodwin
We’d like to thank you all for being with us this morning. Hopefully we have been able to communicate that we are in fact taking actions we committed to in the last conference call we had in February.
Obviously we have been quite busy and we remain focused on continuing to drive shareholder value higher. We will continue to monitor the municipal market place.
We will 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.