Federal Signal chief seeks 'internal merger' to save costs

Federal Signal Corp. Chief Executive Officer William Osborne says his company, creator of the first rotating light for police squad cars, "needs a big internal merger" to improve operating margins.

"Given our history of acquisitions without integration, we have some very good internal projects we can do" that will raise profitability, Osborne said in an interview. Federal Signal, which bought six companies in the last eight years, saw its operating margin drop to 5.8 percent last year from 8 percent a year earlier.

Osborne, 48, said he's had "a baptism of fire," since taking over at Oak Brook-based Federal Signal on Sept. 15 from Ford Motor Co., where he most recently served as president of Ford Motor Co. of Australia Ltd.

"My first day, the Dow tanked about 600 points and we had two operations down from a hurricane in Texas," Osborne said. "We've seen orders drop off in the 15 to 20 percent range so far in the first quarter. Unless there is a miraculous rebound in the economy in the second half, we don't project a growth in revenue for this year."

To adjust for slowing demand, Osborne aims to pare costs by consolidating operations and outsourcing some non-core manufacturing such as metal bending. He also seeks to chop salary costs by 13 percent, or $20 million. Federal Signal, maker of aerial lift platforms for fire trucks, traffic cameras that "read" license plates, and street sweepers, had sales of $958.8 million in 2008. The company had a loss of $95.6 million last year, mostly because of losses on the sale of two businesses.

The U.S. accounted for about 54 percent of Federal Signal's sales last year, and just under a third of those customers were city, town and county governments, the company said in a regulatory filing. Overseas, local governments made up about 70 percent of clients.

The first signs of slowing demand came in government sales, with commercial and industrial revenue weakening since the beginning of the year, Osborne said.

"Frankly, we've seen slowdowns across the globe," Osborne said. "Even in markets where there was formerly blistering growth like China, we've seen slowdowns."

Federal Signal stock has lost 68 percent in the past 12 months while the S&P 400 Industrials Index has dropped 46 percent.

"Federal Signal is facing a number of headwinds in 2009, including tight municipal budgets and continuing legal expenses," said Walter Liptak, a Chicago-based analyst with Barrington Research Associates Inc. "As we come out of the recession the company has a lot of new whizbang products that can help them grow." Liptak rates the shares "market perform" and doesn't own any.

Federal Signal began the first quarter with $33.4 million in cash and short-term investments, more than double what it had at the same point last year.

"Back in the December, in the midst of the credit crisis, we drew down our revolving credit facility, about $20 million," Osborne said. "It was purely a defensive move in the event that the credit situation deteriorated."

Federal Signal invested the money in short-term instruments that come due in the first and second quarter. "We intend to pay down the debt. We don't foresee any need to go to the credit markets this year," Osborne said.

Osborne is trimming costs throughout the company, including the Environmental Solutions Group, the largest of its three units, with $441.5 million in sales last year. The division's products include Elgin-brand street sweepers, which have been "particularly hard hit" by the recession, he said.

"I come from the auto industry, where cost reductions are a way of life," Osborne said. He aims to reduce the number of street sweeper models and has undertaken a design study to find ways to cut material costs.

President Barack Obama's $787 billion economic stimulus plan offers Federal Signal potential to sell more street sweepers and sewer cleaners, primarily through authorizations under the Clean Water Act, Osborne said.

The U.S. highway bill, which is up for renewal during the third quarter of the year, may help boost sales of Federal Signal's products that manage traffic congestion. Data collected from its traffic cameras can be used to better time stop lights and help keep cars moving, which reduces carbon-dioxide emissions from idling vehicles stuck on congested roads.

During the next four-to-five years, growth will come largely from Federal Signal's Safety and Security Systems unit, Osborne said. The business is the company's second-largest unit, with $371.8 million in sales last year, and makes the cameras that read license plates. Federal Signal intends to build recurring revenue from contracts to mine and process data stored on using its technology.

"We believe that the concept of a public safety network is going to take hold in the marketplace," Osborne said. "We believe law enforcement and security is becoming an information business. It is no longer about boots and suits."

Federal Signal's first test project of its public safety network took place with the city of Cincinnati, using a grant from the U.S. Department of Homeland Security. Dubbed "Rings of Steel," the project has put 400 automated license plate- recognition cameras in the city and nearby local communities. The cameras record the license plate location and time, and have helped Cincinnati make 1,100 arrests, Osborne said.