Federal Signal - Earnings Call - Q1 2017
April 27, 2017
Transcript
Speaker 0
Good day, and welcome to the Federal Corporation First Quarter Earnings Conference. Today's call is being recorded. At this time, I would like to turn it over to Ian Hudson. Please go ahead, sir.
Speaker 1
Good morning, and welcome to Federal Signal's first quarter twenty seventeen conference call. I'm Ian Hudson, the company's Interim Chief Financial Officer. Also with me on the call today is Jennifer Sherman, our President and Chief Executive Officer. We will refer to some presentation slides today as well as to the earnings news release, which we issued this morning. The slides can be followed online by going to our website, federalsignal.com, clicking on the Investor Call icon and signing into the webcast.
We have also posted the slide presentation and the news release under the Investor tab on our website. Before we begin, I'd like to remind you that some of our comments made today 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. Our presentation also contains the measures that are not in accordance with U. S.
Generally accepted accounting principles. In our news release and filings, we reconcile these non GAAP measures to GAAP measures. In addition, we will file our Form 10 Q later today. I'm going to start today by addressing our first quarter financial results. Jennifer will then provide an update on our markets and some of our strategic initiatives, including a review of our acquisition criteria, before wrapping up with her thoughts on our outlook for the remainder of 2017.
After our prepared comments, Jennifer and I will address your questions. Our consolidated first quarter financial results are provided in today's earnings news release. Overall, our first quarter results exceeded expectations. Consolidated net sales for the quarter were $178,000,000 up 3% compared to the prior year period. Operating income of $11,300,000 was down from $16,100,000 last year.
The first quarter of last year was atypical in that it was the strongest quarter of the year, and we benefited from entering the year with a backlog that contained higher margin orders for products from oil and gas markets. The reduced operating income in Q1 this year includes the impact of a $2,700,000 increase in depreciation and amortization expense, largely resulting from the depreciation of the rental equipment acquired in the prior year Joe Johnson equipment transaction. Operating income in Q1 this year also included $05,000,000 of acquisition related expenses, dollars $05,000,000 of purchase accounting expense effects and $1,000,000 of combined restructuring and executive severance costs. In Q1 last year, we incurred $05,000,000 of acquisition related expenses and $1,200,000 of restructuring charges. Excluding these costs, consolidated operating margin was 7.5% compared to 10.3% a year ago.
Given the changes in our mix of businesses over the last year, we believe that referring to comparisons of EBITDA is becoming a more relevant measure of our underlying operating performance. On that basis, consolidated adjusted EBITDA in Q1 this year was $18,900,000 compared to $20,800,000 a year ago. That translates to a consolidated adjusted EBITDA margin of 10.6% in Q1 this year compared to 12% a year ago. Income from continuing operations was 7,200,000 in Q1 this year compared to $10,400,000 last year. That translates to GAAP EPS of $0.12 per share, which compares to $0.17 per share last year.
On an adjusted basis, EPS for Q1 this year was $0.14 per share, which compares to $0.19 per share last year. Total orders for the quarter were $215,000,000 up $79,000,000 or 58% compared to the prior year quarter. In addition, the company reported sequential order improvement in Q1 this year, with total orders up $49,000,000 or 30% compared to the 2016. Jennifer will talk about some of the contributing market factors in her remarks. Consolidated backlog at the end of the quarter was $174,000,000 up $37,000,000 or 27% from the 2016 and up a similar amount in comparison to the prior year quarter.
First quarter sales at ESG were $128,000,000 up $12,000,000 or 11%, primarily due to $23,000,000 of incremental net sales resulting from the Joe Johnson acquisition. This improvement was partially offset by lower shipments of sewer cleaners and street sweepers in The U. S. Despite the sales improvement, ESG's reported operating income of $10,300,000 was down from $16,500,000 in the prior year quarter. The reduction in ESG's operating income includes the recognition of the increased depreciation and purchase accounting expense that I just mentioned, as well as negative operating leverage and unfavorable changes in sales mix.
ESG's adjusted EBITDA in Q1 this year was $15,500,000 compared to $18,300,000 a year ago. That translates to an adjusted EBITDA margin of 12.1% in Q1 this year, which compares to 15.9% last year. ESG's first quarter orders of 167,000,000 were more than double its reported orders in Q1 of last year and were up $46,000,000 compared to the 2016. SSG reported a $1,500,000 improvement in operating income in Q1 this year, despite a $7,400,000 decrease in sales, which was largely due to lower sales of public safety products and outdoor warning systems. The increased operating income reflects benefits associated with material and labor cost reductions resulting from initiatives implemented last year as well as lower restructuring charges.
SSG's adjusted EBITDA for Q1 this year was $7,700,000 and its adjusted EBITDA margin was 15.4%, both improved in relation to Q1 last year when SSG's adjusted EBITDA was $7,200,000 and its adjusted EBITDA margin was 12.5%. Orders at ESG were down $4,500,000 primarily due to lower orders for public safety products and outdoor warning systems. As we've noted previously, most of SSG's business normally operates with relatively low backlog. Corporate operating expenses of $5,400,000 were relatively flat compared to last year. Turning now to the income statement.
We reported a 3% net sales increase in Q1 of this year, yet gross profit was lower in comparison to a relatively strong Q1 last year. Consolidated gross margin was 24.5% for the quarter, down from 27.4 last year, largely due to the same factors that impacted the comparison of the group operating margins that I just alluded to. Selling, engineering, general and administrative expenses of $31,500,000 were up 6% compared to the prior year quarter, primarily due to the addition of expenses associated with the Joe Johnson equipment, which was acquired in June. As I just mentioned, in Q1 this year, we incurred $05,000,000 of acquisition related expenses, which was unchanged from the amount recognized in the prior year quarter. In addition, we recognized lower restructuring charges at SSG.
All of these factors roll into the company's $11,300,000 of first quarter operating income. Other items affecting the quarterly results include a $200,000 increase in interest expense associated with higher average debt levels and a 400,000 reduction in other income. These were partially offset by the absence of $300,000 of debt settlement charges incurred last year in connection with the company's debt refinancing. Tax expense for the quarter was down as a result of our lower income with an effective tax rate for the quarter of 34.5%, which was slightly lower than the rate in Q1 last year. Our full year effective tax rate for 2017 is currently expected to be between 3435%, assuming no change in U.
S. Corporate tax rates. From a cash perspective, we are projecting a cash tax rate of approximately 20%. The difference between our effective tax rate and our cash tax rate relates to the use of deferred tax assets to reduce our tax payments. On an overall GAAP basis, we therefore earned $0.12 per share from continuing operations in Q1 compared with $0.17 per share in Q1 last year.
To facilitate earnings comparisons, we typically adjust our GAAP earnings per share for unusual items recorded in the current or prior quarters. In the current year quarter, we made adjustments to GAAP earnings per share to exclude restructuring charges, executive severance costs, acquisition related expenses and purchase accounting expense effects. On this basis, our adjusted earnings from continuing operations for the first quarter were $0.14 per share compared with $0.19 per share in Q1 last year. Looking now at cash flow, we generated $13,700,000 of operating cash flow in Q1 this year, up $20,400,000 compared to Q1 of last year. The first quarter is typically a period in which our businesses add working capital.
We began 2017 with higher working capital levels than when entering the prior year, partly due to the acquisition of Joe Johnson Equipment, whose inventory levels at any point in time can fluctuate based on demand given its distribution model. In addition, the 2017 included improved accounts receivable collections and extension of accounts payable, which were largely timing related. As a result of these factors, operating cash flow in Q1 this year benefited from a lower increase in working capital than in comparison to Q1 last year. The improved cash flow generation helped increase our cash position, and we ended the quarter with $57,000,000 of cash, a $6,000,000 increase from the end of last year. Total debt at the end of the quarter was $65,000,000 and our debt leverage remained low.
We also had two forty three million dollars of liquidity available under our credit facility. We continue to be in an extremely strong financial position. At this point, we have significant flexibility to invest in organic growth, pursue acquisition opportunities and return value to stockholders. On that note, we paid a dividend of zero seven dollars a share during the first quarter, amounting to $4,200,000 and we recently announced a similar dividend for the second quarter. That concludes my comments, and I'd now like to turn the call over to Jennifer.
Speaker 2
Thank you, Ian. I'd like to start by providing some color on the first quarter. As Ian mentioned, we entered 2017 with a smaller backlog that carried a reduced margin than in prior year due to lower industrial demand that persisted throughout most of 2016 and a higher concentration of orders for products manufactured by other OEMs. As such, we were expecting a soft first quarter, but we're pleased to report results that exceeded both revenue and earnings expectations. During Q1, our Safety and Security Systems Group saw similar operating margin benefits to those experienced in Q4 of last year, resulting from actions taken last year to right size the business and reduce material costs.
We were also pleased to report significant increases in orders, both sequentially and in comparison to the first quarter of last year. In fact, our first quarter orders were the highest reported orders for our current group in any quarter in at least the last ten years. The year over year order improvement was largely driven by increased orders within the Environmental Solutions Group, which reported orders of $167,000,000 in the 2017, more than double its reported orders in the prior year quarter. This improvement was largely driven by organic order growth in excess of $30,000,000 as well as the effects of the prior year Joe Johnson Equipment acquisition. The sequential order improvement was primarily driven by a $46,000,000 increase in orders within the Environmental Solutions Group, largely represented by improved industrial demand for sewer cleaners and vacuum trucks, higher municipal orders for street sweepers and increased orders for the distribution of rescue trucks.
Our municipal markets, which have historically represented about 60% of our revenues, remained steady overall. In Q1, strong municipal demand for street sweepers and sewer cleaners within ESG has been partially offset by some recent softness in orders for products of our Public Safety Systems business. These are the part of our Safety and Security group that provides light bars, sirens and related products to municipal customers in the police, fire and heavy duty market. On the industrial side, we are starting to see some signs of encouragement in our end markets, and we noted solid improvement in U. S.
Industrial orders during the first quarter. We also saw strong demand for our new Wolf Hydro Excavator, a recent new product introduced by the Westech business that we acquired last year. We have previously talked about the hangover effects from the downturn in the oil and gas markets in recent years and the impact within the Environmental Solutions Group of an influx of used equipment at drastically reduced prices from entities that are experiencing financial difficulty. In this respect, one of the key data points that we monitor is the amount of used equipment that is available at auction houses. The latest available data indicated there were less than 80 vacuum trucks and hydro excavators currently available at auction, which is a meaningful reduction compared to the same time last year.
In addition, we are pleased with the progress we have made to date on our strategic initiative to diversify our end markets by expanding into the utility market. We have a dedicated team focused on increasing sales of the Paradigm, the purpose built vacuum truck specifically designed for that market, which was first launched from our revamped innovation initiative. Our team has been busy demonstrating the product features to potential new customers, conducting over 40 demos per month. We've also been encouraged by the team's efforts to build brand awareness and their ability to generate orders for the Paradigm. We expect sales of the Paradigm in 2017 to be more than double last year's levels.
We've also noted increased upselling opportunity with multiple instances noted in the first quarter with a demonstration that Paradigm has translated to the sale of either a Prodigy or a full size In the 2017, we sold the same number of Prodigy Hydrax graders as we did in all of 2016. Our financial position is stronger than ever, which helps us continue to fund investments in organic growth initiatives, pursue strategic acquisitions and return value to shareholders. Earlier this year, we introduced a goal to exceed $1,000,000,000 in revenues by 2020. We expect that strategic acquisitions will be a meaningful part of that growth.
In anticipation of the last two years, we've added a number of people to our team with extensive M and A and integration experience. Earlier this month, we welcomed David Martin, our new Chief Operating Officer, who has a strong operations, M and A and integration background. We intend to continue to apply a disciplined approach in evaluating potential future acquisitions, and we expect acquisitions will play a meaningful part of our growth in 2017 and beyond. With that, I'd like to take this opportunity to review the business and financial criteria that we consider in evaluating potential acquisitions. First and foremost, we look for opportunities that will accelerate our strategic initiatives or provide a platform for growth in adjacent markets or new geographies.
We look for companies that have leadership positions in niche markets and demonstrate sustainable competitive advantages similar to our current portfolio of businesses. Ideally, we would also be able to identify synergies, including leveraging the collective distribution channels, our expertise in manufacturing and benefiting from the implementation of our established eightytwenty principles. Outside of product line acquisitions, we also placed significant emphasis on the importance of a strong management team, particularly if the business operates in a new or adjacent market. We have previously spoken about a goal to diversify the mix of our revenue from a 60% municipal, 40% industrial split to a more balanced mix. And therefore, we tend to have a bias towards industrial focused opportunities.
Of the financial characteristics, we target companies with solid growth potential, long term margins that are comparable to or better than our established operating margin targets, healthy cash flow and a return on invested capital in excess of our cost of capital. If we find the right acquisition, we are committed to staying disciplined in terms of valuation. These are the same principles we applied last year in successfully completing the acquisition of Joe Johnson Equipment and Westat. I would like to move on to our earnings outlook. We were encouraged by the significant sequential and year over year increase in orders, particularly within our legacy businesses.
We also saw a sequential increase in orders for the distribution of new product lines acquired in connection with the Joe Johnson Equipment transaction. We are starting to see some signs of momentum on the industrial side and are making good progress with our initiative to expand into the utility market. At the same time, our municipal markets continue to be steady overall. When we issued our 2017 outlook in February, we indicated that our quarterly earnings in Q1 would be the softest of the year. We also noted the recent uptick in orders, including the increase in U.
S. Industrial orders since December. These trends continued through the end of the first quarter. While it is still early days, the first quarter order improvement gives us confidence in our full year outlook. At this time, we are reaffirming our full year 2017 adjusted EPS outlook of zero seven zero dollars to $0.78 Before we move to questions, I would like to call your attention to our annual report video that recaps our key accomplishments in 2016 and plans for future growth.
We previewed this video at our Annual Meeting of Shareholders last week. It is posted on our website under the Investors tab. With that, I think we're ready to open the line for questions. Operator?
Speaker 0
Great, thank We will take our first you. Question from Chris Moore from CJS Securities. Your line is open.
Speaker 3
Thank you. Good morning, guys.
Speaker 0
Good morning, Chris.
Speaker 3
So just you had talked about previously first quarter being earnings being 14% to 16% of the years. Is that number just trying to understand how to look at that. That number adjusted up a little bit given the results were a little bit better than you were looking for? Because obviously that implies a higher kind of guidance range for 2017.
Speaker 1
Yes. I think, Chris, the 14,000,000 to 16,000,000 was kind of probably more of a point in time number that we had when we gave our outlook range at the February. Q1 did end up a little better than we were expecting. There were some benefits on the margins at SSG that probably weren't factored in when we gave the Q1 14% range sorry, 14% to 16% range. So we continue to believe that at this point in time, the outlook range we gave in February is appropriate.
Speaker 3
Got you. Okay. It sounds like you had a good quarter for the Prodigy excavators. The margins on those are at the high end of what you guys sell?
Speaker 1
They're good margin products. They're not as good as the I mean, the hydroxylators come in three sizes. There's the Paradigm, which is the smaller size, there's the five gs, which is the midsize, and then there's the full size hydro. The full size hydros are the really strong margin products. The Prodigy margins are very good and what we've seen is we've seen some pull through from our utility initiative on the Paradigm where we're now seeing some upselling of the Prodigies, which they're still good margin products.
Speaker 3
Got you. And in terms of the operating margins on ESG, I know it's it gets a little bit you need to add back in some of the adjustments and things like that. But moving forward in 2017, is the number the 8.1% for Q1, is that something that can be better than the balance of the year? I know there was lots of things in there you talked about operating leverage, etcetera. Can we get back to the double digits on that?
Speaker 1
Yes. I think, Chris, one of the things that we reference to on the call was just the impact of the depreciation expense on the rental fleet. And as we move forward, one of the things that we're going to start also probably referring to is EBITDA margin, just in reference to that. So we'll be putting out as we do with the long term operating margin targets, we'll be putting out some long term EBITDA margin targets as well. And those should be those, I think, an EBITDA basis, when you strip out the depreciation effects, you'll certainly see the double digit margins for ESG.
Speaker 2
We talked about last year the impact the volume has on those margin targets. And as we move forward to the year, that's something we'll continue to monitor closely. And we expect to see some upside.
Speaker 3
Got it. And last question, just in terms of it sounds like your M and A pipeline is getting pretty full. Is there from an initial leverage standpoint, is there kind of a level that you're comfortable at initially if you see something that's a little bit bigger than what you might have thought initially?
Speaker 2
We've talked about a 3x leverage if there's a clear path to delever.
Speaker 3
And
Speaker 0
our next question comes from Steve Barger from KeyBanc Capital Markets. Your line is open, sir.
Speaker 2
Morning, Steve. Good morning.
Speaker 4
Yes, I'll go back to the nice uptick in orders. Sorry if I missed this, but is any of that activity for stocking orders for dealer or rental? Or are those all for end users?
Speaker 2
They're primarily for end users.
Speaker 4
And so all those orders ship in the next quarter or two?
Speaker 2
Correct.
Speaker 4
And so as you look, I know it's fairly early, only a month into 2Q, but are you trending to a book to bill above one in 2Q in ESG as well?
Speaker 1
We certainly did in Q1. I think we were encouraged by the orders that we saw in ESG in Q1. I think it's still early days. There's still some uncertainty in the industrial markets. We were encouraged obviously with the uptick in industrial.
But there's still some hesitation about capital outlay. We also had entered the year with a pretty low backlog. So there were some of that that is building our backlog back to kind of a more sustainable level. But I think we'll probably have more visibility. We haven't finished April yet, so we want to see the And orders for then we'll come back probably at the end of the second quarter when we have more information.
Speaker 4
Okay. Well, I guess to that point, you said you saw signs of momentum in Industrial. What are you seeing that makes you think things are turning?
Speaker 2
There's a couple of things that we look at. We're encouraged by the progress, although we're in early days on our utility initiative. We expect this year to double the sales of our Paradigm product line, and we've also seen pull through to some of our other hydro product lines. With respect to oil and gas, we haven't factored any meaningful improvement in those markets in 2017. We have seen the amount of used equipment at the third party auctions reduce.
In addition to that, the service work for that type of equipment, we monitor that also closely and we've seen that increase.
Speaker 1
I think one other thing, Steve, that we've seen that's an encouraging sign is we've seen some pretty good utilization rates from a rental fleet on the hydro excavation equipment. What that might suggest is while the rental utilization is good, might suggest that people are pausing in terms of purchasing the equipment outright, but that's one of the benefits the rental fleet has for us.
Speaker 4
Right. Well, guess on Hydrovac specifically, given some of the new product introduction, is it your view that, that business is up year over year in 2017 versus last year?
Speaker 2
Yes.
Speaker 4
And if I heard right, the paradigm in the midsize trucks are growing faster than the big ones. Is that a function of weight restriction regulations at all in certain geographies? What's driving
Speaker 2
No, it's really it's a purpose built product for the utility market. And this is a new initiative for us. Historically, we haven't done a lot of business in the utility market. We now have a portfolio product and a dedicated channel. We're starting to see the benefits of that initiative.
Speaker 4
So true success in the marketplace with a new product introduction?
Speaker 2
Correct. And I would add there that we're also encouraged by the introduction of our Wolf product line from the Westech business that we acquired last year. We introduced the product at our large trade show in February. We're in very early days, but it's off to a strong start.
Speaker 4
All right. And I'll just ask one more and get back in line. Can you talk about lead times for the big purchased items right now, whether it's chassis or anything else? Are you seeing those stretch to you? Or is everything still flowing pretty smoothly?
Speaker 2
Everything's still flowing pretty smoothly.
Speaker 4
All right, thanks.
Speaker 0
Our next question comes from Walter Liptak with Seaport Global. Your line is open, sir.
Speaker 5
Hi, thank you. Good morning, guys.
Speaker 2
Good morning, Walter.
Speaker 5
I wanted to go back to that first question about the guidance. Thinking about the orders and the way that the first quarter trended, I wonder if we could just revisit why you didn't take up your guidance for the full year.
Speaker 2
No. In February, we when we set the guidance, we had talked about the order trends that we were seeing in December, January and February, which were improving, and we factored that into the guidance. We also noted that the first quarter was going to be our softest quarter. So there was going to be meaningful improvement in quarters two, three and four. So the increased order trends give us confidence that in the full year guidance, and we'll be able to achieve that improvement in quarters two, three and four.
Speaker 5
Okay. Fair enough. Let me then ask a little bit about the orders. I wonder if you could and maybe the better the best way to look at it is sequentially, the orders that you took in this quarter around the vehicle part of the business. Can you break out for us what kind of products those were?
Was it largely the sweepers and sewer cleaners? And how much of it is I think those refuse would be a pass through the rental or through the through Joe Johnson. Maybe if you could just parse out for us what kind of products that have been working out that you ordered.
Speaker 1
Sure. So well, I'll say sequentially, our orders were up almost $50,000,000 from Q4 last year. Of that, 46,000,000 came from the Environmental Solutions Group. Half of that improvement was the organic improvement in our legacy business and about half of it was from Joe Johnson from the acquisition. And then within of that improvement at Joe Johnson, about half of it was for products that somebody else manufactures and about half of it was for products.
So it's kind of a mixed bag. There is on the of the products that we manufacture, the improvements were really from industrial markets for sewer cleaners and vacuum trucks. And then we also saw higher demand from municipal orders of street sweepers.
Speaker 5
Okay. All right, Corie.
Speaker 2
What's encouraging was the improvement is not just driven by one particular business. It's really our Vactor, Elgin and Joe Johnson businesses.
Speaker 5
Okay, great. Yes, thanks for the color. I wonder if you could tell us a little bit about selling prices. We've seen raw materials, and I think chassis prices have been up recently as well. How are you doing on price and price cost?
Speaker 2
We operate in competitive markets, as you know. But we manufacture premium products and we have several programs in place regarding pricing discipline and we've been able to increase our prices this year. And we're confident in our ability to continue to do so.
Speaker 5
Okay, great. And the you talked a little bit more about M and A, and you've got some fairly large targets out there for acquisitions, the aspirations for acquiring businesses. What does the pipeline look like this year? Do you think you'll be able to get one?
Speaker 2
Yes. It's always difficult to know until you sign the deal, but our pipeline is active and we're looking at a number of different opportunities. And we tried to lay out for you guys on the call in terms of the criteria that we're looking at.
Speaker 5
Okay. You've done share repurchases in the past. Did you repurchase stock this quarter? And what's your feeling on share repurchase?
Speaker 1
We didn't do any share repurchases in Q1. Well, in terms of our priorities, tend to prefer investing in organic growth first. Then we look at acquisitions, then We paid a dividend of $4,200,000 in Q1 and did a similar just announced a similar one for Q2. And then we look at opportunistic share repurchases and we'll continue to do that through the rest of the year.
In terms of remaining authorization, we still have about $31,000,000 left under our authorization for share repurchases.
Speaker 5
Okay, great. All right. Thank you.
Speaker 2
Thank you, Walt.
Speaker 0
And our next question comes from Marco Rodriguez from Stonegate Capital Markets. Your line is open.
Speaker 6
Good morning, Thank you for taking my questions.
Speaker 2
Just a real
Speaker 6
quick housekeeping item. Do you, by chance, have the gross margins per segment?
Speaker 1
We do, Marco. Those are going be disclosed in the Q when we file that. I don't have them handy right now, but when the Q is filed shortly, you'll see them in those materials.
Speaker 6
Got you. Okay. Then just kind of coming back and circling around the ESG group. Obviously, operating margins are somewhat depressed here partially because of the D and A, but then also you've got the negative operating leverage that you guys have pointed out fairly consistently. Just wondering if you have done anything in terms of the cost structure to kind of help alleviate that negative operating leverage?
And if so, is there a new revenue run rate where you kind of start to breakeven on that operating leverage and then you kind of get the positive effect going forward?
Speaker 1
Yes. I mean we've taken some of the SG and A cost out of the SG businesses. It's probably not clear in the comparability of the numbers because of the addition of the acquisitions. But if you take into account the acquisition and normalize it, then we've taken some fixed costs out of ESG. We continue to look at the cost of our materials.
In terms of leverage, obviously, Q1 of this year, had some pretty low sales volumes. What gives us encouragement going forward is any uptick in orders, will hopefully help our volumes moving forward and that should help us on the as we can get more equipment for our factory and that we should get the benefits from that operating leverage. Got
Speaker 6
you. And just to clarify, if I heard you correctly, on the order uptick you guys saw here in Q1 for ESG and I guess the company in general, was it fairly spread between industrial and municipal? Did I get that correctly?
Speaker 1
Yes. Yes. The $50,000,000 sequential improvement, said $46,000,000 was ESG. And then of that amount, it was a fairly even split between our legacy businesses and then Joe Johnson. Within the legacy businesses, we saw both high maintenance orders for street sweepers as well as higher industrial demand for sewer cleaners and vacuum trucks.
So as Jennifer said, it was really across the board. It was we saw some nice improvement.
Speaker 2
And it's this broad based improvement that gives us encouragement.
Speaker 6
Got you. Got you. Okay. And to follow-up some of the questions here on the M and A pipeline. Could you maybe kind of put a little bit more color in terms of do you have more opportunities now compared to, let's say, the same time last year?
And are the valuation numbers that you're looking at, are they somewhat attractive or a little stretched? Any additional information there?
Speaker 2
As you know, we bought two companies last year and I would say in our acquisition pipeline, as we've previously reported, it's an important part of our growth story. So we're active in the market and then we'll continue to do so. With respect to valuations, we will be disciplined. And so regardless of what's in the marketplace, we've walked away from a number of acquisitions because of valuations that didn't make sense for Federal Signal, and we will continue to employ that disciplined approach going forward.
Speaker 6
Got you. And last quick question, I'll jump back in the queue. Working capital here in the quarter was obviously very helpful to your cash flow. And you did note some timing issues with the payables. Is there anything in there that is, I guess, kind of sustainable that you should see more of an addition to cash flow from working capital?
Or is it just kind of an aberration kind of everything kind of hit at once here for Q1?
Speaker 1
I think that, Martha, the thing that is difficult to predict sometimes is with the inventory levels at JJE. I mean, they saw some strong orders in Q1. Those to fill those orders, you need a lot of inventory. So some of the timing effects of carrying the inventory with J and J's distribution model cause some swings in working capital and can result in our cash flow being a little bit more volatile than maybe it historically has. There's a number of initiatives we have in place to improve the working capital in terms of collections, in terms of improving terms and then things like that.
We'd expect it to be difficult to predict, but I think in terms of the legacy businesses, we have some improvements that we're planning on implementing.
Speaker 6
Got it. Thanks a lot, guys. I appreciate your time.
Speaker 2
Thank you.
Speaker 0
I have a follow-up question from Steve Barger with KeyBanc Capital Markets. Your line is open. Parker, your line is open.
Speaker 4
Sorry, I was muted. Just a question about your new COO, if he's in the room. Or I think you said he'll be helping out with the acquisition focus. But is there a priority list for his initial kind of actions internally?
Speaker 2
Yes. He is in the room. We're thrilled that he's joined the company. Initially, we have a lot of different projects going on. Both our SSG and our ESG businesses report directly to Dave.
So he's working, I would say, the majority of the time with those businesses. But he will be involved in any acquisition with respect to both the evaluation of the acquisitions and the integration of the acquisitions. So we're very fortunate to have his skill sets and we think that they really are perfect with respect to the types of growth that we anticipate for Federal Signal going forward.
Speaker 4
Understood. And you did have some acquisition related charges in the quarter. Was any of that related to due diligence for potential deals? Or was that all for prior activity?
Speaker 1
So the piece of that, Steve, that relates to every quarter, at least for the next couple of years, we have to remeasure the fair value of the earn out for Joe Johnson. That flows through that line. About half of that charge related to basically just the accretion of the discount we took just to record at present value. There some expense relating to some exploratory diligence that we conducted.
Speaker 4
Got it. Okay. That's all I have. Thanks.
Speaker 2
In closing, I'd like to reiterate that we are confident in the long term prospects for our businesses and our markets. We would like to express our thanks to our stockholders, employees, distributors, dealers and customers for their continued support. Thank you for joining us today.
Speaker 0
That concludes today's conference. Thank you for your participation. You may now disconnect.